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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121566  
Subject: Re: house construction tax law Date: 4/14/2008 6:06 PM
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RBMunkin: "I often get better answers here than at the IRS so before I call them, I'm wondering if anyone here knows much about house construction taxes.

Let's say someone is in business of buying land, building a house on it, and selling it. They have costs and income, a bottom line, and the profit ends up on Schedule C and there is income tax and SE tax. Just for example, let's say:
Land cost $20K
Construction cost $250K
Sale price $350K
Profit $80K

If they had the land for a year or two and it appreciated to, let's say $50K, can they not put the land on Schedule C as above but instead take it as a capital gain?
So the profit picture would look like this instead of the above:
$250K construction cost
$300K sale price (land sold "separately" for $50K)
Profit $50K.

Then take the land separately as $30K capital gain.

Can they do that? It's kind of like "pretending" they sold the land separately, isn't it? Seems a little fishy to me but I've been told by three contractors now that that's how they do it. Is it legitimate?"


First, asking this question on April 12 is probably not the best timing. The resident pros tend to get very busy (which makes them more selective about the posts to which they respond); also, allow for 1-2 weeks of decompression for the balance of April.

Second, I am not a tax pro, but an interested kibitzer and my $0.02 is that the this sound not legitimate to me because it appears to elevate form over substance.

--- land is simply inventory for someone in the business of buying land and building homes and IIRC, inventory does not get capital gains treatment.

--- your proposed scenario is ripe for allocation problems; why not place all the gain on the land?

--- once the improvements are built, it becomes much more difficult to sell the land separately because who wants to own improvements on land to which one does not have access or rights to use the improvements? And absent some very specific contractual provisions, title to the improvements would normally pass with the land and not separately.

I will be curious to read what the resident pros have to write, but you might want to give them a few weeks to respond.

Regards, JAFO

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