How does Tax Gain in a property works?

Question

Hi there, I am trying to purchase a land for investment? But before doing it I would like to know the process of it. The land is empty but with easement for utilities. My plan is to buy the land, build a house and sale it.

What are pros and cons on doing this investment plan?

Can anybody explain how taxes are reported through this process?

What are other alternatives used to not being tax that much on a property when selling it?

Jaysen Medhurst · Answer

Hi Marco,

What you're doing is called "spec building," because you're speculating that you can build the house and then sell it for a profit. If this is your 1st foray into REI, I would be cautious. This is a big lift and it could go South very fast.

If you have a partner (like an experienced developer/builder or RE Investor), this could be an amazing learning opportunity. If not, I would pass and find another way to get your feet wet.

There's a ton of risk here. Not the least of which is that the market turns and you're left with a half-built house and stack of bills.

As far as taxes go, you'll be responsible for income taxes on any profit. Same rate as if the money came from a normal job. You can reduce this by holding the property for at least 2 year as a rental and then selling. The profit is then "investment income" and taxed at the lower rate. Review this strategy with a tax lawyer first. The IRS has specific rules.