If I decide later to start a construction business (actively building and selling new spec houses), assuming this is taxed as ordinary income with social security, etc and treating the homes as inventory - if you build a house, then sell it, then spend that money building a second one, but don't sell it until the next year, then sell it, then build another, can you effectively push off the taxes as you are rolling the sale proceeds into new inventory costs / construction costs? Or do you have to pay the tax on all gains regardless of whether you spend that money on building a new home? I thought with ordinary businesses you can subtract expenses from revenue and pay tax on the end result allowing you to keep reinvesting into the business? I'm not talking about 1031 exchange here.
Nope, because it is treated as inventory. Just like in a retail business when you sell a pair of jeans you report the income on that pair of jeans based on what you paid for that pair of jeans. You don’t get to deduct the price of the pair of jeans you bought to replace that pair, to sell later.
What you said would be nice but cannot be done.
Also, let’s say you make 10000, from one sale this year and put all that money on the next project that are not able to sell it until next year, you will owe taxes on the 10,000 this year.
On top of that, you might not be able to deduct the expenses on the project you have started this year but couldn’t sell.
That is why we suggest people to make sure you manage them cash flow to cover taxes on your current year sale. If you keep on investing everything you make, you will short on cash to pay estimated tax each quarter.
The government needs its money. I wish your theory worked. You can’t even do what you suggested using qualified money in IRAs or 401ks without paying taxes.
Make your money and plan on paying taxes as it a cost of doing business.
Small homebuilders building spec homes normally use the completed contract method. You deduct the costs of the spec home when you sell the house and the profit is the sale price less the costs. That is usually ordinary income tax rates. You could argue the the activity is not regular and continuous enough in order to be considered a trade or business, so it would be a capital gain. In your case, because you start a construction business, the intent is clear and it will be ordinary income from a trade or business.
Originally posted by @Michael Pham :
You could argue the the activity is not regular and continuous enough in order to be considered a trade or business, so it would be a capital gain.
No, you cannot win this argument, except in some very unique circumstances. Like when you were building a house to occupy yourself and then ended up changing your intentions and selling it.