Tax Question - Building and Selling New Construction

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Tax Question - Building and Selling New Construction

Daniil Grinchak
Contractor · Indian Trail, NC · Member since 2016 · 7 posts · 0 votes

Hi All,

I am looking for an experienced tax CPA in Charlotte, NC area. I have questions around taxes for new construction that I will be selling soon. I have searched through BP but still not confident on what I need to do so looking for local advice from CPA. 

I started to build new homes and planning to sell them and not hold them for long term. Looking for a proper way to reinvest funds into the next project. I have been told that there are way to reinvest into next project with out being taxed on the profit but looking for advice. 

If you know anyone and can recommend please let me know. 

Thank you in advance. 

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Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
9y
Originally posted by @Sandor Bogdan:

If you wait for a year it is considered long term capital gain and you only pay 15% taxes. You really need to get an experienced CPA though.

 Please stop telling people this.  Flipping or building new homes is not capital gains.  I am on a crusade to stop people from spreading information that you can somehow convert a flip or a new build to capital gain.  The only way to do that is to convert it to a rental before you sell.

The IRS does not care if you buy bread and lunch meat and sell sandwiches or build or improve a house.  It's the same business model.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    pretty simple its ordinary income.. make a lot of money pay your tax's and off you go.

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  • Daniil Grinchak
    OP
    Contractor · Indian Trail, NC · Member since 2016 · 7 posts · 0 votes
    9y

    @Jay Hinrichs I have been told that there are legal ways to reinvest all of the profits back in to the next project/house without being taxed on it, is that true in anyway? Not looking for way to avoid tax but since I just started building homes, I am reinvesting all funds to next house. Thank you

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    9y
    Originally posted by @Daniil Grinchak:

    @Jay Hinrichs I have been told that there are legal ways to reinvest all of the profits back in to the next project/house without being taxed on it, is that true in anyway? Not looking for way to avoid tax but since I just started building homes, I am reinvesting all funds to next house. Thank you

    Not that I know of (nor do either of my CPAs)...

    If you figure something out, I'm guessing there are a LOT of people who would love to know more...  :)

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y
    Originally posted by @J Scott:
    Originally posted by @Daniil Grinchak:

    @Jay Hinrichs I have been told that there are legal ways to reinvest all of the profits back in to the next project/house without being taxed on it, is that true in anyway? Not looking for way to avoid tax but since I just started building homes, I am reinvesting all funds to next house. Thank you

    Not that I know of (nor do either of my CPAs)...

    If you figure something out, I'm guessing there are a LOT of people who would love to know more...  :)

    the only way to do that is to buy and hold  rent them out then down the line sell them and 1031.

    if your intention is to sell once done then its inventory .. just like a car dealer has inventory..

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  • Curtis WatersBusiness Member
    Rental Property Investor · Charlotte, NC · Member since 2013 · 291 posts · 176 votes
    9y

    @Daniil Grinchak - Fix & flips are considered inventory in your business.  When you sell the home you take it out of your inventory and the property gain or loss is considered ordinary income (I am not a CPA but previously a registered tax preparer).  I recommend you confirm with a CPA.  I recommend a CPA who also owns real estate - Eric Little at http://mycarolinacpa.com.

    You are probably thinking of a 1031 Tax Free exchange.  See this article - 1031 Exchange.  The requirements require you to have the property more than 1 year (which will kill most flips financially) and is primarily focused on buy and hold properties.

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  • Daniil Grinchak
    OP
    Contractor · Indian Trail, NC · Member since 2016 · 7 posts · 0 votes
    9y

    Thank you all for you input. I do appreciate it. 

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  • Michael Roth
    Houston, TX · Member since 2017 · 6 posts · 1 vote
    9y

    @Daniil Grinchak -- Doing a 1031 Like Kind Exchange is what you are referring to. I haven't done one just yet, but you must use a qualified 1031 specialist to oversee the sales of your new construction. Funds will go into an escrow account, then you have ~180 days to redeploy the capital into new properties. The catch is you must identify those properties within the first 60 - 90 days (of the 180) then transact on some or all of those properties within the 180-day window as mentioned. If you do what Jay mentioned above, then you will get taxed at short of long term rates, depending on how long the construction took. From my understanding, a 1031 defers taxes, so at some point down the road you will need to pay taxes on earnings -- this just allows you to put more capital to work today thus do more (or bigger) projects. PS - I'm not a CPA, so you should find some experts online or in your area. Best of luck - Mike

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  • Sandor Bogdan
    Investor · Sherman Oaks, CA · Member since 2016 · 10 posts · 3 votes
    9y
    If you wait for a year it is considered long term capital gain and you only pay 15% taxes. You really need to get an experienced CPA though.
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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Sandor Bogdan  just waiting is not enough when your in the business of building and selling new homes.. its INTENT.... sometimes you hold inventory longer than a year you still pay ordinary income.

    you have to build with the INTENT of renting and show that you are keeping them.. then you can put them over on your rental schedules.. you will not get CPAs normally to buy off on hey I owned 366 days so it cap gains

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  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    9y
    Originally posted by @Sandor Bogdan:

    If you wait for a year it is considered long term capital gain and you only pay 15% taxes. You really need to get an experienced CPA though.

     As mentioned this in incorrect. 

    If you're engaging in the business of buying/flipping or building from scratch you're operating a business. It's not going to be Capital gains regardless of how long you hold it. 

    Maybe find an CPA with much...much more...or maybe just better? experience than whoever you've spoken with. 

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Michael Roth, the business model that @Daniil Grinchak is using will not allow 1031 exchanges.  House construction is considered to be creating inventory for sale and not holding for productive use.  So the business of new construction and sale will always be taxed as ordinary income.  The 1031 could only be used if they held on to their houses and rented and later decided to sell.

    Or another favorite model I've seen -Build two.  Move into one when complete and sell one.  Use the sale to finance the next two construction projects.  Meanwhile live in the first one for two years and sell it tax free under the primary residence exclusion.  Then move into one of the next two completions.  Tax free income and a new house to live in every two years.  No tax deferral on the other one but sometimes a little bit is better than nada!

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  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    9y
    Originally posted by @Sandor Bogdan:

    If you wait for a year it is considered long term capital gain and you only pay 15% taxes. You really need to get an experienced CPA though.

     Please stop telling people this.  Flipping or building new homes is not capital gains.  I am on a crusade to stop people from spreading information that you can somehow convert a flip or a new build to capital gain.  The only way to do that is to convert it to a rental before you sell.

    The IRS does not care if you buy bread and lunch meat and sell sandwiches or build or improve a house.  It's the same business model.

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  • Sandor Bogdan
    Investor · Sherman Oaks, CA · Member since 2016 · 10 posts · 3 votes
    9y

    Thanks everyone for the correction. I obviously did not have right information here. 

    0Reply
  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    9y

    Hi @Daniil Grinchak, 

    The business strategy that you are operating under involve the acquisition and holding of property for sale and not holding the property for rental, investment or business use. Properties must be held for rental, investment or business use in order to qualify for 1031 Exchange treatment. Properties acquired with the sole purpose of building/development and then immediate sale are treated as inventory in a real estate business and do not qualify for tax-deferred exchange treatment. I am not aware of any other strategies available for your type of business model.

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  • Daniil Grinchak
    OP
    Contractor · Indian Trail, NC · Member since 2016 · 7 posts · 0 votes
    9y

    Thank you all for your input and I am reaching out to local CPA to get more details.

    0Reply
  • Don Harris
    Realtor · Charlotte, NC · Member since 2014 · 935 posts · 467 votes
    9y

    @Daniil Grinchak congratulations on your construction success. I would like to learn more about it. Regards , Don

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  • Chad Leton
    Flipper · Delafield, WI · Member since 2016 · 28 posts · 14 votes
    9y

    Good question and great read. Presented with a similar opportunity @Daniil Grinchak. Also interested to hear what info you get from the local CPA

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  • David Ferrette
    Developer · Austin, TX · Member since 2014 · 266 posts · 110 votes
    8y

    @Linda Weygant

    If I am building a spec home and have expenses in 2017, but sell the home for profit in 2018, when do I take my 2017 losses?  At the end of the 2017 tax year or at the end of the 2018 tax year when I show my total profit/loss on the project?

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  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    8y
    Originally posted by @David Ferrette:

    @Linda Weygant

    If I am building a spec home and have expenses in 2017, but sell the home for profit in 2018, when do I take my 2017 losses?  At the end of the 2017 tax year or at the end of the 2018 tax year when I show my total profit/loss on the project?

    You match the income with the expenses, so generally nothing is declared in 2017 and it is all then recognized when you sell in 2018.  There are a few exceptions and some optional items that you could choose to declare in the year spent, but the vast majority of expenses that went directly into the house will be recognized at sale. 

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  • Amber Porter
    B, WA · Member since 2017 · 8 posts · 1 vote
    8y

    All I can think of is that you might be able to recognize other losses at the same time you are profiting on the sale.  

    That is why investing is more tax friendly.

    But is it possible to do this building/selling activity within a Roth IRA?

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  • Nate Lindquist
    Realtor and Investor · Portland, OR · Member since 2014 · 21 posts · 7 votes
    7y

    This may throw a wrinkle in the conversation, but what if you own an investment property that's been rented for years, say a run down duplex.  Tear it down, build 2 new townhouses and sell them individually.  Capital gains, or ordinary?

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    7y
    Originally posted by @Nate Lindquist:

    This may throw a wrinkle in the conversation, but what if you own an investment property that's been rented for years, say a run down duplex.  Tear it down, build 2 new townhouses and sell them individually.  Capital gains, or ordinary?

    First, I'm not a tax professional, so don't rely on anything I say about this stuff...

    Investment property (rentals) will never be ordinary income, they are always capital gains.  Now, under 366 days is short-term capital gains, which is taxed at marginal rates like ordinary income, so the rate is identical.  But, it's still worth noting that rentals under 366 days are short-term capital gains and not ordinary income.

    For your example, I'm pretty sure that you'd be taxed at long-term capital gains rates, regardless of the fact that you tore down and rebuilt.  I'm *guessing* that tearing down and rebuilding is no different than just doing some major capital upgrades (from the viewpoint of the IRS), which doesn't change the fact that you held it as an investment for longer than a year.

    I'm sure one of the knowledgeable tax professionals here will correct me if I'm wrong...

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  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Nate Lindquist:

    This may throw a wrinkle in the conversation, but what if you own an investment property that's been rented for years, say a run down duplex.  Tear it down, build 2 new townhouses and sell them individually.  Capital gains, or ordinary?

    Excellent question. 

    There was a very recent tax case where someone had this exact scenario with a primary residence. They lived in their home for like 15 years. Tore it down and built 2 new properties and sold them. The IRS ruled that they did NOT qualify for the 121 capital gain exclusion because the house the occupied as their primary no longer existed. 

    Your original intent was to keep it as a rental. But if you then decide to tear it down and immediately sell...that sounds like the motive changed. I think the IRS would rule it was ordinary income but I'd have to do further research to give a definite. 

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    7y
    Originally posted by @Natalie Kolodij:
    Originally posted by @Nate Lindquist:

    This may throw a wrinkle in the conversation, but what if you own an investment property that's been rented for years, say a run down duplex.  Tear it down, build 2 new townhouses and sell them individually.  Capital gains, or ordinary?

    Excellent question. 

    There was a very recent tax case where someone had this exact scenario with a primary residence. They lived in their home for like 15 years. Tore it down and built 2 new properties and sold them. The IRS ruled that they did NOT qualify for the 121 capital gain exclusion because the house the occupied as their primary no longer existed. 

    Your original intent was to keep it as a rental. But if you then decide to tear it down and immediately sell...that sounds like the motive changed. I think the IRS would rule it was ordinary income but I'd have to do further research to give a definite. 

    And this is why I said to ignore any advice I give on tax stuff!  :-)

    Thanks Natalie!

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  • John Carbone
    Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
    3y
    Quote from @J Scott:
    Originally posted by @Natalie Kolodij:
    Originally posted by @Nate Lindquist:

    This may throw a wrinkle in the conversation, but what if you own an investment property that's been rented for years, say a run down duplex.  Tear it down, build 2 new townhouses and sell them individually.  Capital gains, or ordinary?

    Excellent question. 

    There was a very recent tax case where someone had this exact scenario with a primary residence. They lived in their home for like 15 years. Tore it down and built 2 new properties and sold them. The IRS ruled that they did NOT qualify for the 121 capital gain exclusion because the house the occupied as their primary no longer existed. 

    Your original intent was to keep it as a rental. But if you then decide to tear it down and immediately sell...that sounds like the motive changed. I think the IRS would rule it was ordinary income but I'd have to do further research to give a definite. 

    And this is why I said to ignore any advice I give on tax stuff!  :-)

    Thanks Natalie!


     How is it classified if you build a house new construction, live in it for 2 years then sell it? Does this qualify for 250k/500k exclusion? What if you live in temporary housing on the property while the house is being built, does the clock start when you occupy the property in the temporary housing or when the main structure is ready?

    also, what if 1 year into living in the new property you decide to build another new construction and when it completes 1 year later you decide to sell the prior one for a profit and occupy the new one. Does this qualify every 2 years for the exclusion? 

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