Short term vs. Long Term Capital Gains

9 Replies

I purchased my 2 family property in March of 2017 and spent the following few months doing renovations, upgrades etc.  It wasn't until rented until Mid-August 2017.  My question is if I chose to sell the property today, will I be past the 1-year mark to be considered a long-term capital gain or is it based on when the property was put in "service" as my Tax form 4562 calls it aka rented out?

Thanks in advance!

For capital gains it depends on when you bought it.  The date you placed it in service affects capital vs. expense.  Most money you spend before its in service adds to your basis, which actually decreases your gain if you sell.  But that money cannot be expensed when it was spent but rather must be depreciated over multiple years.  Money spent after its in service may be immediately deductible as expenses.

@Greg Kendall

You start calculating the holding period the day that you purchase the property. In this case it would me march 2017.

Sorry, one more follow-up question.   The capital gain is calculated based on your purchase price and then your sale price regardless on what you owe on the property - correct?  

@Greg Kendall another thing to consider is whether or not this property is inventory, or a capital asset. The industry term for this is “dealer property” there is a great deal of case law on the issue as to what you should be considering in performing this analysis.

If the property is treated as inventory, the gain is ordinary income, not capital gain.

A conservative approach is to hold the property 2-years post completion to treat it as a capital asset.

You should speak to your tax advisor on this issue as it is a complex analysis.

@Greg Kendall

The Capital Gain will be your selling price minus your basis.

Your basis = purchase price PLUS capitalized costs (which would include many of the costs incurred to get the property to "in-service" origination costs, closings costs) MINUS depreciation taken.

And you are correct- the amount you owe is not factored in, although certain loan costs and interest can be either capitalized or expensed.

Also @Andrew Reyes brings up a great point- if you intended to sell this property after you had rehabbed and placed a tenant, you may be seen as a flipper and the gain could be taxed as ordinary income.

Andrew also mentioned that holding for 2-years will help. This is more of a "safety net"/conservative approach than a requirement (as Andrew also correctly pointed out). Your intention matters a lot here- be sure to talk with a real estate CPA who knows your entire situation.

Understood and thanks @Andrew Reyes .  I certainly will review with my accountant before making any decisions.  When I bought the property, I had every intention of holding it for quite awhile but with the market where it is at the moment you can't help but look at selling as an option.

What exactly determines whether or not a property is “in-service”?

Originally posted by @Evan Barney :

What exactly determines whether or not a property is “in-service”?

It means that it could have a tenant on that day - or "ready and available" for rent. If there's no kitchen - then it is not ready. If it still needs some touch-up here and there - then it probably is ready. As you can see - subject to interpretation.

A commonly accepted trigger is when you start advertising the property - either online, by listing with an agent or by placing an outside sign.

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