A novice question here, figured I can ask the Bigger pockets community for some quick help. I'm beginning the process of building my first spec home. How does the tax side of the sale go when I resell? I know it being considered a capital gain, it changes things as to what I am use to doing. My LLC is setup currently for my rental portfolio... Should I transfer the building into the LLC before reselling? Or is that a completely different structured LLC for building a spec home for capital gains. I'm aware of the 1031 exchange also, just looking for some advice on the process.
Profits from building a spec home are ordinary income, plus med/SS, period. No cap gains or 1031. The med/SS may can be avoided if your LLC is taxed as an S Corp. Talk to your CPA, which knows your whole picture.
The 1031 Exchange requires that you have the intent to hold for investment, so if your plan is to build and then sell, you will not qualify for 1031 Exchange treatment. However, if you build and hold as rental property, then you would qualify later for 1031 Exchange treatment. It all boils down to your intent to hold vs. intent to sell (i.e. hold as inventory).
Awesome, thanks much for the input, i'm glad to now know!
Mine is treated like regular income, but I take a lot of business deductions and full advantage of an SEP which I can then self direct into other builder's projects to avoid UBIT and self-dealing. Make sure you have a good CPA who can keep you straight.
@Steven Hamilton II We've found that there are not really that many rules or much paperwork for Corps & LLCs but they're often disregarded. So whatever your Tax Advisor says to do, DO IT. Otherwise they're off the hook and the IRS is eager to unwind a transaction to increase their revenue.
@Mike Hurney ,
I"m not quite suire what you meant; however, you are required to do full bookkeeping with any business venture. You must also keep detailed track of intent with the property. I've seen the IRS unwind transactions that people were trying to skirt the rules on.
Oh and P.S. I work with these audits regularly. My primary clientele consists of real estate investors.
@Steven Hamilton II
I know this is an older thread, but why is a corporation better for flipping or spec building?
Thanks for your time and consideration!
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