Posted by David Krulac on June 12, 2000 at 09:27:11:
you can rent, L/O, contract for deed or other such with a house to avoid dealer status, these are more difficult to do with land.
the question was about buying multiple lots, a typical dealer activity. some rehabbers don’t buy multiples at one time.
Need your help in structuring a plan for selling building lots to reduce I.R.S. tax burden. - Posted by Thurman
Posted by Thurman on June 11, 2000 at 22:49:17:
I’m in the process of buying some building lots for $8,000 (total price)and sell them for $20,000 (contract for deed).
Problem: I understand that the I.R.S. consider an installment sale the same as a cash sale, which means that I am going to have to pay income tax for the year of $3360. Since my net income, after total year payment to my seller of $2040, for the first year is about $1488. Which means out of pocket payment to the I.R.S. of $1872. That doesn’t make me happy.
Is there a better way to sell these lots so as to reduce the tax burden for the first year? The Fair Market Value on these lots are $12,000.
Any constructive ideas would be appreciated.
Your friend,
Thurman
The dreaded triple whammy and paying the piper! - Posted by David Krulac
Posted by David Krulac on June 12, 2000 at 05:02:29:
Thurman,
You didn’t say how many lots and whether this is your only or majority of your business/income. Dealer status which generally applies to lot retailers precludes you from the favored installemnt treatment, and precludes you from using a 1031 tax free exchange.
Dealers also can’t use long term capital gains treatment, 20% tax for most properties owed over one year. This triple whammy from your favorite uncle makes lot sales from a tax prospective not too good.
However, there seems to be profit here so maybe you just pay the piper (not Jpiper). And if you sell fewer than some number that the IRS isn’t disclosing, maybe 5 or 6 lots a year and the majority of your income is from another source then you may not be a dealer. This could be a whole new routine for Jeff Foxworthy? There is one consolation for lot lot sellers, and that is if you own the property for more than 5 years you may be able to take the favored long term capital gains treatment.
David Krulac
Doesn’t this same problem apply to houses? - Posted by Ron (MD)
Posted by Ron (MD) on June 12, 2000 at 07:58:21:
David,
You seem to say that this problem relates to lot sales on land contract. Don’t you also get hit if you are buying and re-selling houses?
Ron