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Sale of land and house

Aaron
Level 3

Hello All,

I am struggling to confirm my assumption. Any guidance is appreciated:

Facts:

Bought land two years ago.

Started building a house this fall and is completing soon.

Was going to live there but now plans to sell soon.

Clients other income is over 80k so it matters.

My assumption. Land is long term capital gain, house is short term capital gain. Allocate sale price based on initial cost basis of land and home.

Thanks in advance,

Aaron

 

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11 Replies 11
TaxGuyBill
Level 15

@Aaron  wrote:

My assumption. Land is long term capital gain, house is short term capital gain.

Allocate sale price based on initial cost basis of land and home.


 

Yeah, I would enter it as two separate sales.  I don't have citations for that, but that is what I would do.

No, the sale price would be allocated on the Fair Market Value of each on the date of sale.

BobKamman
Level 14

That's an interesting question.  Does he happen to have a history of building and selling other houses after "deciding not to live there"?  If not, there are some regulations under Section 1250 that might help, but this isn't Section 1250 property -- nothing there to depreciate.  I found this online but couldn't find its source:

Holding period. Use the following guidelines for figuring the applicable percentage for property with two or more elements.

  • The holding period of a separate element placed in service before the entire section 1250 property is finished starts on the first day of the month that the separate element is placed in service.
  • The holding period for each separate improvement qualifying as a separate element starts on the day after the improvement is acquired or, for improvements constructed, reconstructed, or erected, the first day of the month that the improvement is placed in service.
  • The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property.

https://www.biggerpockets.com/forums/51/topics/256349-tax-pro-question-one-year-clock-on-new-home-bu...

If you have to treat it as two separate sales, I'm not sure how you would allocate the proceeds.  Initial cost basis, or current FMV (as suggested by @TaxGuyBill )?  I would want to find a way to justify stating that the cost basis and FMV of a house that just cost $200K to build is the same amount -- $200K.  So all the gain is from the land, and long term.  

Maybe you should call IRS and ask their Holding Period specialist.  (<---Inside joke.)

Aaron
Level 3

Thank you for taking the time to answer.

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sjrcpa
Level 15

In 2 years, after selling expenses, there will be a profit?


ex-AllStar
Aaron
Level 3

Yep, I live 2.5 hours North of the Minneapolis/St Paul where the riots were. Our housing market has gone bananas with the mass exodus from there. 

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TaxGuyBill
Level 15

I live in the twin cities (suburbs).  There are so many businesses in that area that still have all of their windows boarded up.  It's kind of creepy to drive in that area.

BobKamman
Level 14

According to RedFin, homes in St Paul are selling for a median price 7.6% higher than last year. The number of homes sold was 374, up 80 from the prior year, but hardly a mass exodus.

Many homes get multiple offers, some with waived contingencies.
The average homes sell for about 1% above list price and go pending in around 21 days.
Hot homes can sell for about 4% above list price and go pending in around 11 days.

 

TaxGuyBill
Level 15

Housing was going dramatically up, but after the riots happened, things slowed way down, especially in the actual city.

In the suburbs, many homes used to have multiple offers and 'pending' to be sold on the first day.  It was rare that a house was on the market for more than a week.  While things aren't 'bad' now, they have slowed down significantly in comparison to what it was like before.

BobKamman
Level 14

So you have a problem there too, with real estate agents keeping prices low so they can collect a quick commission and move on to the next one after paying this month's rent?  Average time on market in Minneapolis is 25 days.  There are always just as many buyers as sellers -- if a few people don't want to stay and try to make it a better place, then there's a fast highway for them to Hibbing.  

IRonMaN
Level 15

But we are looking at building a wall starting at McGregor.  I’m guessing Mexico has expended all of its wall money so we might have to see if Canada wants to chip in.

ACME Taxes, Tatoos, Tires and Turtles (I've expanded my line of products to better serve you)
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BobKamman
Level 14

Show me a 15-foot wall in the Northwoods and I'll show you a mosquito-powered drone that can lift you 16 feet.