Minimizing Taxes When Building and Selling Homes – Advice Wanted
Koloa, HI · Member since 2015 · 19 posts · 11 votes
Minimizing Taxes When Building and Selling Homes – Advice Wanted
Most Popular Reply
Ryan MancusoBusiness Member
Real Estate Agent · Prescott, AZ · Member since 2019 · 31 posts · 13 votes@Jeremy Santy Great Question.
I am in a similar predicament. I am not a CPA, but I am a licensed agent and I buy land, build a duplex and then sell them in AZ. Though not all projects are home runs, they have been an incredible learning experience for my partner (the builder) and I.
I have spoken with a 1031 exchange mediator and she confirmed what others in this thread have said. The intent is the most important part of the exchange. Usually timelines are around 3 years to hold it.
Have you thought of doing a refi once you're done, renting it and then re-using that money for another project? That money is (to my understanding) non-taxable and then you can rent it, depreciate it and then sell it later when the capital gains hit is lower (long term rather than short term)
What I have chosen to do is build and sell through my LLC for these projects. I save on commissions because I am an agent, but I pay the taxes upfront, but that way, my cash is liquid and my overall tax hit is a lot lower than if I had a w2 job.
Everyone has a different reason they do things, but hopefully you can pick up some ideas! And I would love to learn if there are other ideas I have not considered.
@Jeremy Santy Great Question.
I am in a similar predicament. I am not a CPA, but I am a licensed agent and I buy land, build a duplex and then sell them in AZ. Though not all projects are home runs, they have been an incredible learning experience for my partner (the builder) and I.
I have spoken with a 1031 exchange mediator and she confirmed what others in this thread have said. The intent is the most important part of the exchange. Usually timelines are around 3 years to hold it.
Have you thought of doing a refi once you're done, renting it and then re-using that money for another project? That money is (to my understanding) non-taxable and then you can rent it, depreciate it and then sell it later when the capital gains hit is lower (long term rather than short term)
What I have chosen to do is build and sell through my LLC for these projects. I save on commissions becauase I am an agent, but I pay the taxes upfront, but that way, my cash is liquid and my overall tax hit is a lot lower than if I had a w2 job.
Everyone has a different reason they do things, but hopefully you can pick up some ideas! And I would love to learn if there are other ideas I have not considered.
8 Replies
- 1yMelissa JusticeBusiness MemberRental Property Investor · Phoenix, AZ · Member since 2024 · 518 posts · 1k+ votes
Hey @Jeremy Santy
There are definitely some strategies to consider depending on your goals and timeline:
1. Primary Residence Exclusion: If you live in the property for at least 2 out of the last 5 years before selling, you may qualify for up to $250K (single) or $500K (married) in capital gains exclusion. This is the cleanest way to reduce taxes, but it does require genuine use as a primary residence.
2. Entity Setup: If you plan to do this more than once, setting up an LLC or S-Corp can be helpful—not necessarily for tax savings alone, but for liability protection and to help separate personal and project finances. However, frequent builds and sales through an entity may cause the IRS to treat it as inventory and subject to ordinary income tax, not capital gains.
3. 1031 Exchange: This only works for investment properties (not primary homes), but if you rented the home out for a period first, you might be able to qualify. Timing and intent are key, and you'd need to reinvest the full proceeds into another investment property.
4. Developer vs. Investor Classification: Be mindful—if the IRS considers you a dealer (developer/flipper), your gains may be taxed as ordinary income, not capital gains. Intent, frequency, and presentation (e.g., how it’s marketed) can all influence this classification.
5. Installment Sale or Cost Segregation: Depending on how the sale is structured, you might benefit from an installment sale (spreading gain over multiple years) or depreciation strategies if the home is held as a rental before sale.
Ultimately, it’s wise to loop in a CPA or real estate tax strategist early, before you sell, so you can align your structure and timeline with a tax strategy.
Best of Luck!Melissa Justice
Investment Strategist at Rent to Retirement
- 1yMohamed YoussefBusiness MemberAccountant · Brea, CA · Member since 2018 · 118 posts · 62 votes
Holding on to the asset for at least 12 months will make a difference, as it will be taxed using the long-term capital gain tax as opposed to the short-term or regular tax rate. Maybe rent it for 12 months, then you can sell or do a 1031 exchange and defer the gain.
You can also move into the property, but you have to live in it for at least 24 months to get the primary residence exclusion, AKA Section 121 exclusion. It's $250K for single and $500K for married filing jointly. - CPA| New Clients Welcome| 50 States · Member since 2016 · 440 posts · 93 votes1y
Hi @Jeremy Santy, you've come to the right place. There are over 20 active CPAs here in BiggerPockets that can help you evaluate the feasibility of structuring the sale, explore legitimate tax deferral or minimization strategies, understand the long term tax implications if you decide to pursue construction and sale projects and ensure you comply with all applicable tax laws. Make sure to reach out to one with real estate experience.
- Koloa, HI · Member since 2015 · 19 posts · 11 votes1y
Thank you all for the helpful responses! I've bounced this question off my CPA as well but wasn't sure if there was something that I was missing. A few people in this community have bought land, built and sold and I was curious if they knew something that I didn't or, if they were just taking the tax hit which is still worth it because there's still an upside to building spec homes. This discussion definitely gives me more confidence in renting the home out at least for a year. And, great timing as I just met with a property manager yesterday! Thanks again BP community!
- 1yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Jeremy Santy Like what @Melissa Justice said, you must have lived in the property for two out of the previous five years you've owned it to qualify for the 121 exclusion, allowing you to take the first $250k ($500k if married) of the gain tax-free.
In order to qualify for a 1031 exchange, which would allow you to defer all of the tax and depreciation recapture to reinvest into another investment property, you must have had the intent to hold it for investment use.
Most folks feel that any hold over a year is adequate. But there is no statutory holding period to determine when a property qualifies for a 1031 exchange, but most importantly, how you demonstrate the intent to hold. So, traditionally, longer would be better. This is why fix n flips don't meet this criteria because they are held as inventory and not an investment. Say you put a renter in the property for a year, then that would be perfectly fine.
Occasionally, there are cases where some unexpected catalyst will cause an investor to sell, or they receive an offer that was too good to refuse, despite their intent to hold. These situations can happen, but when they happen multiple times, they seem a lot less "accidental".
If you can stretch your timelines a bit. And build, rent, and then sell, you'll add another 20-30% to your bottom line. and get the benefit of depreciation on your tax bill.
The 1031 Investor5137 Reviews - 1yJulio GonzalezPro MemberSpecialist · West Palm Beach, FL · Member since 2008 · 4k+ posts · 1k+ votes
@Jeremy Santy If you're open to renting for a period of time, components of the property (like appliances, flooring, fixtures) may be depreciated faster using bonus depreciation. But this will require solid tax planning. Feel free to reach out if you have any questions!
- 1yRyan MancusoBusiness MemberReal Estate Agent · Prescott, AZ · Member since 2019 · 31 posts · 13 votes
@Jeremy Santy Great Question.
I am in a similar predicament. I am not a CPA, but I am a licensed agent and I buy land, build a duplex and then sell them in AZ. Though not all projects are home runs, they have been an incredible learning experience for my partner (the builder) and I.
I have spoken with a 1031 exchange mediator and she confirmed what others in this thread have said. The intent is the most important part of the exchange. Usually timelines are around 3 years to hold it.
Have you thought of doing a refi once you're done, renting it and then re-using that money for another project? That money is (to my understanding) non-taxable and then you can rent it, depreciate it and then sell it later when the capital gains hit is lower (long term rather than short term)
What I have chosen to do is build and sell through my LLC for these projects. I save on commissions because I am an agent, but I pay the taxes upfront, but that way, my cash is liquid and my overall tax hit is a lot lower than if I had a w2 job.
Everyone has a different reason they do things, but hopefully you can pick up some ideas! And I would love to learn if there are other ideas I have not considered.
@Jeremy Santy Great Question.
I am in a similar predicament. I am not a CPA, but I am a licensed agent and I buy land, build a duplex and then sell them in AZ. Though not all projects are home runs, they have been an incredible learning experience for my partner (the builder) and I.
I have spoken with a 1031 exchange mediator and she confirmed what others in this thread have said. The intent is the most important part of the exchange. Usually timelines are around 3 years to hold it.
Have you thought of doing a refi once you're done, renting it and then re-using that money for another project? That money is (to my understanding) non-taxable and then you can rent it, depreciate it and then sell it later when the capital gains hit is lower (long term rather than short term)
What I have chosen to do is build and sell through my LLC for these projects. I save on commissions becauase I am an agent, but I pay the taxes upfront, but that way, my cash is liquid and my overall tax hit is a lot lower than if I had a w2 job.
Everyone has a different reason they do things, but hopefully you can pick up some ideas! And I would love to learn if there are other ideas I have not considered.
- 1yAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
@Jeremy Santy Great question, building and selling homes can be profitable, but the tax treatment depends heavily on your intent and structure, and it can be the difference between capital gains and ordinary income.
If you build and sell with the intent to profit, the IRS may classify you as a dealer, meaning your profits are taxed as ordinary income (not long-term capital gains), and you could also be subject to self-employment tax. This applies even if you’re not operating a formal construction business—intent and repetition matter.
Here are a few strategies to consider:
1. Build as a Primary Residence:
If you live in the home for at least 2 of the last 5 years, you may qualify for the Section 121 exclusion (up to $250K single / $500K married) of tax-free gain. This won’t work if your intent is resale, but it’s a powerful option for a home you live in first.
2. Use an S Corp or LLC (taxed as S Corp):
If you plan to build and sell regularly, creating an entity structure can help you manage self-employment tax exposure and isolate liability. Profits are still ordinary income, but you may reduce payroll taxes by paying yourself a reasonable salary and taking distributions.
3. 1031 Exchange Doesn’t Apply:
Unfortunately, 1031 exchanges don’t apply to homes you build and sell as inventory. They’re only for properties held for investment or business use—not resale.
4. Consider Long-Term Hold Strategy:
If you hold the home as a rental for a year or more, you may qualify for capital gains treatment upon sale. Bonus: You can use cost segregation and depreciation during the hold period to offset rental income or other gains.
5. Timing & Frequency Matter:
If you sell a single home occasionally, you may avoid dealer status. But doing it repeatedly within short timeframes can trigger ordinary income treatment, even without an LLC or business label.
This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.
INVESTOR FRIENDLY CPA®5241 Reviews
Join the conversationCreate a free account to reply, vote on answers and follow this thread.