Taxpayer purchased land in early 2019, and built a house on it in 2020. He intended on moving into the house, but to sell instead late in 2020 before moving in. Land was held for more than a year, so I believe that portion of the sale should be considered a long-term capital gain with the remainder being short-term. Someone can correct me if I'm wrong, but I haven't found anything that says you CAN'T do this.
My problem is splitting the sale price between land/building. I looked at the tax assessment from the county and considered using that to split the cost between land and building, but it would result in a large gain on the land a loss on the building. Any thoughts on this?
but it would result in a large gain on the land a loss on the building.
Whose side are you on here, anyway?
Seems perfectly reasonable to me that land would appreciate from 2019 prices, when everyone started wanting to socially distance. And construction costs soared when housing became scarce and workers were collecting unemployment. Maybe the guy wasn't much of an architect and built the place without a kitchen because he doesn't like to cook.
I'm on the side of doing what is correct and not raising red flags.
So do you think that this approach would be reasonable and correct to split the sale short-term and long-term? In this situation, the land was purchased for about $40k and the tax assessment on the land is about $150k.
Only narcissists think that IRS is going to take a look at every return that happens to report a minor real estate deal. The problem here is whether any loss can be claimed on any part of the deal because it was an asset held for personal use. That gets back to the question of holding period. There's probably some case law on that, but the week before April 15 is not the time to be looking for it.
The question is at what point the personal asset turned into an investment. Or was that his intent all along. "I can make a lot of money on fliipping this dirt if I put up some sticks with a roof, but if that doesn't work out I can always live in it until I find a buyer."
"I looked at the tax assessment from the county"
Take the assessment from the purchase timeframe, not current. Take the purchase of the land compared to the assessed value as the FMV ration for the land and use that going forward to break the land out from the total sale for current values.
That's what I do in a resort area near me, because the lots increase more than the buildings are even worth, quite often.
"Level Up" is a gaming function, not a real life function.
Historically county assessments are simply guesses. Getting a "real" appraisal for the value of land vs improvements is what would be best. I would be inclined to ignore the county assessment. The house is being sold with the land as a whole unit. One sale, no allocation. Since the house was completed less than a year ago you have short term gain or loss on the sale.
Getting an appraisal months later, when the taxpayer no longer owns the house, is not only impractical, it's meaningless. And it's the sale of one property, but with two holding periods.
Hypothetical: Taxpayer owns Lot A for 20 years. He buys adjoining Lot B and then sells them both in a single transaction six months later. Since the combined property was created less than a year ago, it's all short-term? I don't think so.
There are some interesting rules that apply only to low-income housing properties that deal with breaking down the holding period based on when parts were refurbished or rebuilt. Those don't apply here, but they show recognition of the question.