Rental Property Investor · VA · Member since 2020 · 9 posts · 4 votes
Hi all,
Lately, I have been trying to do my best to learn the different tax laws and am confused on a few different things. Recently, my accountant told me that if I hold a property for over a year in a LLC that does multiple flips a year, it will still be taxed as ordinary tax and not the capital gains tax. This particular property was land that was being subdivided to sell parcels. Everything I look into says if you hold for over a year you receive the more favorable capital gains tax. Does anyone have a direct link to help me understand if he is correct?
Also, I was advised not to defer taxes from an "opportunity zone" because it would require an S-corp or a partnership. Neither, according to my accountant, is favorable because if you have to move the property out of a corporation it would mean serious tax implications. Also, something about not being able to write off depreciation. He is a very good accountant but everything I read tells me the opposite of what I have been told. If anyone has a link to an IRS page that could help me understand the different implications of rental property in a corporation vs sole-proprietor, I would greatly appreciate it.
Lately, I have been trying to do my best to learn the different tax laws and am confused on a few different things. Recently, my accountant told me that if I hold a property for over a year in a LLC that does multiple flips a year, it will still be taxed as ordinary tax and not the capital gains tax. This particular property was land that was being subdivided to sell parcels. Everything I look into says if you hold for over a year you receive the more favorable capital gains tax. Does anyone have a direct link to help me understand if he is correct?
Also, I was advised not to defer taxes from an "opportunity zone" because it would require an S-corp or a partnership. Neither, according to my accountant, is favorable because if you have to move the property out of a corporation it would mean serious tax implications. Also, something about not being able to write off depreciation. He is a very good accountant but everything I read tells me the opposite of what I have been told. If anyone has a link to an IRS page that could help me understand the different implications of rental property in a corporation vs sole-proprietor, I would greatly appreciate it.
Thank you,
Christie
On question regarding the ordinary income versus captain again, Your CPA is correct.It’s the intention that matters. However I see that if you can structure this deal correctly you can qualify for a long time capital gain.
Tips to get capital gain treatment on the sale:
A) If you have actual investment property and you are dealer:
-Maintain separate book
-Document intent to hold the property as investment property in Minutes or other document
-Report expense as investment expense on tax return
-Also use separate entities.
Using controlled entity to get capital treatment on land:
-it is important that the sales price reflect the property's actual FMV at the time of sale. the formalities of a sale must be observed.
-If the sale involves a note, regular and timely payments on the note should be made, and repayment should be based on the value of the underlying property rather than the success of the land development.
-the seller should collateralize the note with the property (although the construction lender will want the note subordinated), pay off the loan (in addition to regular payments) with release fees as each lot is sold, and make sure the interest is paid (not accrued) regularly.
Your issue is classics dealer vs investor issue.
Note: Classification of gain as capital or ordinary is determined property-by-property, based on the statutory determination of whether the property is a capital asset or property held for sale to customers in the ordinary course of business. Meaning a person can be both dealer and investor.
To determine if the taxpayer is a dealer three questions must be answered:
(a) What is the taxpayer's trade or business?
(b) Did the taxpayer hold the property primarily for sale in that business?
The Supreme Court holds that primarily for sale means of “first importance” or “principally” (MALAT V. RIDDELL).
Determining if property is held primarily for sale to customers in the ordinary course of business is based on the facts and circumstances. Among the facts to consider are the (Ralph S. Norris; Pool)—
i. owner's intent (nature and purpose for which the property is acquired);
ii. extent of improvements and advertising to increase sales;
iii. number, frequency, and substantiality of sales [this generally is the most important factor (Suburban Realty Company)]; See (c) below
iv. duration of ownership;
v. continuity of activity related to sales over a period of time;
vi. extent and nature of the efforts to sell the property;
vii. extent of subdividing and development to increase sales;
viii. use of a business office for the sale of the property; and
ix. character and degree of supervision or control over representatives selling the property
Note: Per court case SUBURBAN REALTY CO. v. U.S: The "holding purpose" inquiry may appropriately be conducted by attempting to trace the taxpayer's primary holding purpose over the entire course of his ownership of the property [Not just time of the sale]
(c) Were the sales ordinary in the course of that business?
Sales are ordinary if they are normal for business, which may be based on their frequency and substantiality
Note: Per court case SUBURBAN REALTY CO. v. U.S: It will remain true that the frequency and substantiality of sales will be the most important factor. But the reason for the importance of this factor is now clear: the presence of frequent and substantial sales is highly relevant to each of the principal statutory inquiries listed above. A taxpayer who engages in frequent and substantial sales is almost inevitably engaged in the real estate business. The frequency and substantiality of sales are highly probative on the issue of holding purpose because the presence of frequent sales ordinarily belies the contention that property is being held "for investment" rather than "for sale." And the frequency of sales may often be a key factor in determining the "ordinariness" question
Note: Per court case TIMOTHY J. PHELAN, ET UX. V. COMMISSIONER: Frequent and substantial sales of real property more likely indicate sales in the ordinary course of business, whereas infrequent sales for significant profits are more indicative of real property held as an investment.
