Would this be a Long Term Capital Gain, or Ordinary Income?

Question

I purchased a vacant plot of land over a year ago. My original intention was to flip it, but now I'm thinking of placing a mobile home on it and selling it. Would the proceeds of this sale be considered long term capital gains, or ordinary income?

I should note that I have never had a house built or mobile home installed before, so it is not a normal course of business for me.

*Bonus points for anyone who can tell me if my profile pic is being displayed correctly. It appears sideways on my iPad :)

Joshua D. · Answer

Sideways pic on my iPad...

Dave Toelkes · Answer

@Mark Beekman

@Scott Vance came closest to giving you the correct answer.  The IRS only considers your intent.  Contrary to what others are saying, flip property is not a capital asset, but instead, it is merchandise to your property flipping business, even if you only do one flip.  Capital gains tax treatment does not apply to business merchandise.

Any profit is ordinary business income, even if it takes longer than one year to complete the flip.  Developing now then selling does not change the character of the deal, the transaction is still a flip and your profit is still ordinary business income.

When you fill out Schedule C (1040) for your flip, the IRS will not let you recognize the flip acquisition until the year of sale. This means that if your flip was bought this year, but does not sell until sometime in 2017, your acquisition date will be 01/01/2017 when you complete your Schedule C.  Even if it takes ten years to complete the flip, the acquisition date is always in the same year as the sale.

Consult a licensed tax professional for specific guidance as it may relate to your unique circumstances.

Victor N. · Answer

You did not use the land in an active trade or business so it is a capital asset and the gain or loss will be a capital gain for income tax purposes.  If you have held the land over a year, the gain will be taxed at long term capital gains. The mobile home in your scenario is also a capital asset. If you hold the mobile home less than a year before selling it, the gain or loss would be taxed at ordinary income tax rates. Remember you will be limited to deducting a maximum of $3 ooo per year in capital losses in excess of capital gains. If you do not rent the mobile home while you hold it, there will be no depreciation deduction.

Scott Vance · Answer

Dealing with this question can be complex.  I pulled a quote from my tax materials.  A tax court judge once said of the issue  “If a client asks you if the sale of a piece of property will generate ordinary income or capital gain, tell them you don’t know. Then tell them that no one else in town does either.”  In my practice if a client comes to me with this question, and they have a background as a flipper I am going to lean toward income, if they are brand new to real estate and this happens I might go with a long term gain if held over a year.  I think alot of the answer depends on your intent when purchasing the original property and numerous other factors as outlined in this article;

Forbes Article on Cap Gains vs Income

I would recommend getting a trusted tax advisor involved sooner rather than later.

Fred Heller · Answer

Not a tax expert but the rules are pretty straight-forward regarding capital gains. If you hold the asset for one year or less and sell it for a profit, this would be taxed as ordinary income. If you hold it for longer than one year, it would be taxed at the lower long-term capital gains rate.

Mark Beekman · Answer

Thanks, @Joshua D. Voted up.

I changed the orientation of the pic, but it may take a few minutes to show up.

Would this be a Long Term Capital Gain, or Ordinary Income?

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