Is it hold cost or capital gains?

Question

To the CPA/investor/developer community:

I am under contract for a parcel of industrial land that is 9 acres.  I want to maintain approximately 1 - 1.5 acres for building a warehouse space for my company as a long term hold.  The remaining I plan to market at 2-3 acre lots for resale.  (The property had been divided into smaller lots in the past and replatting should be no issue)

My question:  Does continuing to hold onto a portion of the land impact long term vs. short term capital gains? If I market aggressively and try to sale quick will I have short term capital gains tax as a result?  I will (or can) still maintain the original note on the 9 acres but pay down as lots are sold off.  Or could a strategy be to secure an interest only loan and not aggressively pursue the sale off until after year one?

It may be as simple as a hold cost vs. tax consequence.  Who do I want to pay the least...the bank or the government?

Ashish Acharya · Answer

Yes, that is reasonable. If you and the seller already had the purchase price allocated to the value of the pond when you bought it, you might have to stick to that value.

If not, you have to do reasonable allocation. Based on the transaction amount, might need the appraisal to defend your position if doing so cuts your taxes.

Ashish Acharya · Answer

That not how it works.

Generally, You will have to to allocate the purchase price to each acre. And when you sell it, your gain is based on sale price minus the cost ( original purchase price allocated to that acre) .

Let’s say you purchased 10 acre for 100k.

I each acre had 10k purchase price allocated and that your basis

If you sell one acre for 20k. Your gain is 20k -10k. =10k.

This is very simple example.

Also if your have previously sold a land or will sell land like this more often in coming years, you might be considered a dealer and your gain will be ordinary gain. All your transactions has to be structured correctly to avoid dealer taint.

You surely need to talk to your professional

Lance Lvovsky · Answer

@Craig Tripp

Sell in 12 months or less and short term. Anything longer is long term.

Craig Tripp · Answer

Thanks again @Ashish Acharya, that makes sense.  Detention pond is not in place now (only a requirement for future development), but it gives me a solid plan going forward.

Craig Tripp · Answer

@Ashish Acharya

Thank you for reply, I was afraid of that but makes sense.

Do I get to assign the value to each acre (within reason)? Close to 1 acre may be needed for detention pond, can I value that less than a prime spot with more road frontage?

Sam Shueh · Answer

Neither. Bottom line you changed cost basis and each sale is like a tax gain.

Craig Tripp · Answer

Thank you.  I think I poorly worded the question, and should have given an example:

Have I realized  a gain in this scenario?

Purchase: $275k (9 acres)

Sale: $150k (approx 3 acres)

Maintain: original note and remaining acreage

I haven’t necessarily shown a gain on the sale as I still have $125k in the overall purchase, or have I?

I understand the short vs. long... but am confused if I even have a tax consequence?

Tanner Crawley · Answer

@Craig Tripp Hmm, Interesting topic. I'm not sure Craig, but i'm following this thread as well now.

Craig Tripp · Answer

@lance lvovsky

Thank you.  I think I poorly worded the question.  Have I realized  a gain though in this scenario?

Purchase: $275k (9 acres)

Sale: $150k (approx 3 acres)

Maintain: remaining acreage

I haven’t necessarily shown a gain on the sale as I still have $125k in the overall purchase, or have I?

Is it hold cost or capital gains?

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