Tax Treatment For Land Entitlement Strategy

[Stuart Udis]

I sat in on a webinar yesterday for a land development fund where the sponsors get land under contract with the intent of completing entitlements before finding a builder to acquire the property for horizontal & vertical development. The sponsor explained their process as merely holding the contract without ever settling on the land yet suggested the LP's who invested in the fund would receive long term capital gains treatment. Would love to hear from the tax professionals how this is possible. I was under the impression the land must be owned for over 1 year but intent is a second consideration as the IRS will take into account dealer vs. investor.  Thanks in advance

[Jay Hinrichs]

Quote from @Stuart Udis:

@Chris Seveney My thoughts exactly. Tax treatment has such a significant impact. I was surprised they couldn't provide an explanation of why this fund would generate LTCG treatment despite asserting it would. Perhaps they thought the investors listening in would be so mesmerized by the excel slide showing the potential of a 5.8X multiple in a 3-5 year hold and 80%+ IRR they wouldn't sweat the small details :)

not a tax expert of course.. However It would be interesting to see if you have a contract and your entitling property you dont own and then you sell in less than a year ( which I would think would be pretty limited as entitlements take longer generally speaking) to me thats ordinary income from time and intent.  Going over a year but you still have intent? 

i know with folks I have worked with over the years to keep from dealer status they would get the plat ready but never record it. once recorded the thought is you now have inventory IE individual parcels. 

I have fund 3 of these types of deals in WA DC one closes Nov. And we have been in it about 18 months the other two we will be in them about the same. I am meeting my client and BP con starting tomorrow and will ask him what he plans to do.. We are just lenders so its ordinary for us but my client has BIG UPS and this would be critical for him tax wise. Will report back .