Tax efficient way to sell condos

5 Replies

**Posted this in the 1031 section already, but this might be a better place to put this topic**

Wanted to check in with BP and see if anyone had any experience with selling new construction condos and any advice how on to be tax efficient.

I'm currently constructing a 37 unit condo project and plan to sell the condos individually at retail price. As I understand, most developers who do this have to pay short term capital gains on proceeds and doing a 1031 exchange is challenging, unless I purchase 37 individual properties. 

Alternatively, instead of selling the condos, we could perhaps "lease to own" the property for 12 months in order to reclassify the condos as a long term capital gain which would result in being a taxed a lower capital gain %.

Was wondering if anyone had any experience with this and any advice.

Thanks

Jason

Joson, constructing 37 unit condo is a considered a taxpayer's trade or business.  Sales of real estate that are an integral part of a taxpayer's business, rather than held for investment or speculation, are considered ordinary income. The sale will not qualify for capital gain treatment. 

Additionally, qualifying sales by investors are eligible for installment sale reporting, while dealer sales are not. You are not an investor, you are a dealer. 

There are ways to change part of ordinary gain to capital gain if the project is planned in advanced. If a condominium developer owns appreciated land on which the condominiums are to be built, a sale of the land to a controlled development corporation prior to undertaking development activities may convert part of prospective ordinary income into capital gain. There is another way  by selling it to "Middle Man"

You should talk to a qualified CPA on this before its too late. Sometimes other actual investment property that you have might be treated as dealer property if you don't have separate books and you will lose capital and passive activity.  you should also use separate entities for dealer activities and investment activities if you have any. I do not know your situation so I suggesting all these. Please talk to your CPA as soon as possible. 

I second @Ashish Acharya comments.  Your proposal to lease to own for 12 months prior to sale will not convert the property to investment use.  Instead, the lease to own strategy will just be viewed as a technique to facilitate sale of your dealer realty.  No matter how long the "lease" period runs, your original intest was to sell the property, and that has not changed with your "lease to own" sale.  I would have the same comment if you had suggested a contract for deed strategy.

1031 update-changing in the congress:

Where are we on §1031? However, in the Senate we came away from our meetings with the feeling that they look at §1031 as something they can go after do w/o it.

  • November 1, 2017 : Text of tax reform bill will be released by the House Ways & Means Committee.
  • Week of November 6: Mark up in the House Ways & Means Committee.
  • Week of November 13: House Floor consideration of the tax reform bill. / Mark up (tentative) in the Senate Finance Committee.
  • November 17 - December 24: Passage of tax reform bill targeted for as early as the Thanksgiving recess (November 17) or as late as Christmas Eve.
  • The goal of the White House and Republican leadership is to have a tax reform bill signed into law within the next 3 to 8 weeks. That's no more than 56 days from today.

The latest news on timing is:

The timing for tax reform has accelerated with the passage of the Senate budget by the House today. With the reconciliation process a reality, a tax reform bill can pass with no Democratic votes. House Ways and Means is on a turbo-charged timetable and we believe the tax reform bill will be introduced next week.

@Jason Mak , You'll want to involve an attorney in the documents but there can be a huge difference between leases with options and "lease to purchase" in terms of how you are treating the property.   Still, all in all 37 units is a truckload to figure out.  Paying the tax and getting them gone but a select few might be your best bet. 

I still think this is a great play for someone to take down all.  I wish I had a nickel for everyone of my clients who's tried to take over a condo building one unit at a time. Unfortunately all I got was a gray hair for each and no nickel!  

Next time get the dirt and entitle it but do not turn a shovel.  Sell it to another entity on  an installment sale and let the other entity absorb ordinary income on construction while the profit from the dirt is at least capital gain.

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