How to Avoid Capital Gains ?

[Ralph McDaniel]

I listened to a BP pod cast last month and someone said if your business is to flip homes, you do not need to pay capital gains tax for less than 12 months. I mentioned this to my CPA and they were not aware of any such codes that would allow this. Any help would be greatly appreciated. Thanks in advance.

 

[Sean Ross]

Quote from @Steve K.:

Quote from @Sean Ross:

@Ralph McDaniel,

The IRS applies the Long-Term Capital Gains rate to investments that are held for more than 12 months.  If you hold your property for less than 12 months, it is considered Short Term.  (You can read more on the IRS website here - https://www.irs.gov/taxtopics/tc409#:~:text=Generally%2C%20i... from capital assets that you hold for less than one year (short-term) are almost always taxed at your ordinary income rate. This can be between 10% and 37% generally at the federal level (state taxes also apply).

Gains from capital assets held longer than one year are taxed at LT gain rates, which range from 0% to 20% federally (state taxes also apply). 

If you "flip" homes repeatedly as a business, the IRS might designate you a "developer" rather than an investor, in which case your properties will not be considered capital assets. Instead they will be considered inventory. Inventory is not eligible for capital gains treatment.

This is great Sean, thanks for posting. Is what I’ve been told accurate that it’s more about the intention than the timeframe? For example if a flips takes 14 months instead of 12, it’s still taxed at the short term rate because the intention was always to flip? Or if the intention is to long term buy and hold but those plans change and the property is sold after 11 months, is still long term cap gains (if there are any cap gains, probably not in this case unless improvements were made)? Thanks again.  

@Steve K.,

I wish there were a super clean delineation that I could make for you here. In some respects, it depends on the track record of the investor rather than you timeline of any individual investment. And evaluating the track record is a call that's made first by the taxpayer or their CPA, and ultimately by an IRS auditor (should one get involved). 

it is very true that the IRS cares about intent with respect to capital gains in real estate -- I've certainly seen cases where the statutory timelines were less important and the identified intent of the investor.

with respect to determining whether you qualify as a developer or an investor, it's much more of a "forest" than the "trees"...so holding any given investment for 14 months prior to a flip is certainly no guarantee of receiving long-term capital gains treatment.

I hope this helps.