When a builder builds a house is the sale reported as capital gains or ordinary income?

[jpbrehm]

After some research I believe this business model would dictate that the sale would be ordinary income unless the property was either a rental before a rebuild or converted to a rental after a new build.  Then it would qualify as a capital gains sale.  Is my thinking correct?

[qbteachmt · Accepted solution]

The determination is: Are they "in the business" or not? Your client is in the business, so this would be part of ordinary income, even if a Spec Home was a new endeavor for them. It would be capital gain if they used the property for business, then later sold it, such as, built a shop or new office, or a model home in a development used as an office, first, because that is Placed In Service. Building a house to sell is essentially creating their own inventory, or Product for sale.

[jpbrehm]

That's exactly how I interpret it.  Just wanted confirmation of my thought process.  Thanks.