This is the problem. You made a number of assumptions. First of all, it was easy for me to rattle off the info regarding capital gains because I refer to that on a regular basis.
You also assumed that because one receives $75/hour for tax planning and advice that they are automatically and expert. The initial comment was a joke, which was further accentuated with “HA HA”. More importantly what make me an expert is over 10 yrs of experience.
Third, you forgot that I’m on this board. Which means that I not only read posts and offer my opinions but I understand a lot of what CRE is about. So the fact that I remind you of some narrow minded real estate agent is irrelevant. I understand, welcome and practice creative forms of investing. Most RE agents are like that because they want their money as easily as possible. They have a certain personality, not interested in risks. They want to find buyers the conventional way and pick up their commission at closing.
The point is your smart a$$ remarks annoyed me. The poster had asked if it was possible to AVOID not minimize the capital gains tax. I just told him that 1) he wouldn’t subject to capital gains tax, because his gain is not from a capital asset, 2)1031 may work, it would have to be structured in a way were no boot/cash was received from the transaction 3) if it’s not a 1031, any gain would be included in income because it’s from his business operations.
I just didn’t think the tone of your comments were unwarranted. You can by all means refute what I say, that’s what this board is about but before you do, contact another competent accountant who works in tax and ask him/her the same thing. It’s not a science, a lot of it is interpretation, however some regs are more clear cut then others. Being that I live in Washington,DC and deal with IRS agents from the service on a regular basis, I’ll think I’ll pay more attention to their reservations than yours.
Posted by Eric - GA on October 06, 2003 at 17:11:08:
Had someone mention to me today via email a house he had purchased and that he hoped to sell it witin 60 days so he could avoid capital gains. I’m a fairly experienced investor, but didn’t want to poo-poo his comment without making sure I’m not an idiot. Anyone out there want to verify either for me? (The tax or the idiocy)
Well this is the skinny. People often throw the word capital around when talking about property. Capital gains and losses are the gains and losses from sales or exchanges of capital assets. Property used in ordinary trade or business is usually referred to as a section 1231 asset. It’s NOT capitalized, therefore not subject to capital gains or losses when it’s disposed of. A house may or may not be a capital asset, even though it’s depreciable because in your case it’s used in a person’s trade or business.
An example of that would be inventory. Inventory is not capitalized when acquired, and when it’s disposed of it’s treated as cost of goods sold. The thing is, you and others who flip properties are in the business of buying and selling homes. It’s your business. As a result, the property you dispose of is treated as inventory from a tax perspective and any gain attributed to that disposal (Sale) is treated as ordinary income in the general course of business. Therefore the gain or income is subject to tax at your marginal tax rate and not the capital gains tax rate. The gain/income realized and recognized on that transaction would not go to schedule d.
The 60 day time frame is immaterial because it would only address whether the gain/loss is short term or long term.
I think this answers your question. I usually charge $75/hour for this. HA HA!
As a little caveat, this information is for general use and at the time of submission was accurate to the tax code which may change without notice. This information was not intended as an advisory and I am in no way shape or form bounded by this.
Re: 60 days, no Capital Gains - Posted by phil fernandez
Posted by phil fernandez on October 06, 2003 at 18:04:31:
LOL. He can surely avoid capital gains if he sells within 60 days and doesn’t rent the place out. But instead of paying capital gains tax, probably at 20%, he’ll have his gain taxed as ordinary income at a much higher rate.
Tell the guy he better be talking to a good accountant.
Posted by Blane (MI) on October 08, 2003 at 11:27:26:
Technically correct as far as the specific issue, but misleading as to the ultimate correct answer. The guy was obviously thinking he might be able to avoid taxes period, but as Phil said he needs a good accountant to show him otherwise. And one who will give a straight answer and explain all options, and hopefully less than $75/hr.
A clintonesque answer?
What are you talking about?
I know he was trying to avoid taxes. I was merely giving you and everyone else on this board the same regs and code that the IRS will use when they audit & assess him for his tax deficiency.
The point of my post was to tell him what the code says in English AND to tell him that he has to pay tax. Another accountant IS not liable if the IRS disagrees with that accountant’s interpretation.
Usually if one is uncertain of a type of treatment, they send in a request for a ruling. Pay the tax, request a ruling and if the IRS agrees with your interpretation, request a refund.
The regs clearly state what income is as well as what constitutes a capital asset. Selling and buying houses as a business does not allow the homes to be a capital asset. As a result, income generated from those sales are subject to tax at the regular rate. And since Blane makes his living giving income tax advice to corporations and individuals, you can disregard what I said, because it was Clintonesque.
Unfortunately people think a GOOD accountant or a good lawyer will allow them to do anything like avoid taxes. Some issues may allow a tax payer that sort of leeway, but with regards to income and what’s included in income, that’s RARELY the case.
You can be as creative as you wish, if or when the IRS comes knocking, be sure to have the tax and applicable interest ready, especially since they may have a propensity to audit at that form of business at times.
Re: 60 days, no Capital Gains - Posted by Blane (MI)
Posted by Blane (MI) on October 07, 2003 at 22:34:04:
You’re going to have to give an example. Though I’m not a CPA or tax atty., I believe I’m knowledgeable enough about taxes, and the only way I see taxes avoided in 60 days is with a 1031 exchange. Other than that, he’s on the hook.
Thou doth protesteth too much… - Posted by Blane (MI)
Posted by Blane (MI) on October 08, 2003 at 20:59:44:
One should not necessarily disregard what you say because I say something different, but it’s certainly acceptable to question what you say even though you say or imply (through your indirect backhand) that you give tax advice to corporations and individuals.
I freely admit I don’t advise people about taxes for a living, but charging $75 an hour doesn’t automatically make someone an expert. The attitude behind your response reminds me of real estate agents who only deal with retail buyers. They don’t understand creative investing, they say you can’t buy a house by just making payments, they live in fear of the due on sale clause, and when you make a low cash offer, they treat you like you just tried to molest their Grandmother.
Most people on this site understand that they don’t use a good Accountant to AVOID taxes, they use a good Accountant to MINIMIZE taxes legally. An honorable tradition, and a big difference. I personally don’t care if the IRS ever does come calling with an audit. It doesn’t mean I’m gonna owe more tax. With the “creative” accounting and tax advice I get from folks on this site and elsewhere, I sleep real good at night.