Tax Question On Property I Am About To Sell
I have a question about the taxes on a property I am about to sell. A couple of guys and I found a fixer-upper house. I bought the house under my name. We all used our money to help fix the house. Our thinking was to split the profit when we sell. So when the house sells is profit going to go towards my income at the end of the year? Any insight or help on what we could do would help. Also, could we do a 1031? I have owned the house for 4 months. Thanks.
In my opinion, your property is a flipper and your sale of this property gets dealer tax treatment. A 1031 exchange is not an option for you in these circumstances situation.
Best to consult your attorney and CPA. If you and your partners are treated as a partnership for tax purposes, then only your distributed share of the net profit is taxable income to you. The question is whether you want to be a partnership for tax purposes, and how to transfer your individual contributions to the partnership.
Good questions that all of you shoud present to an attorney and CPA
You can do a 1031.
The easiest thing is to figure out everyone's profit prior to closing. then have your closing agent put in a line item on the settlement statement so that profits are distributed during closing. That way the settlement statement show only your profits as net proceeds to seller.
brenda
Brenda,
Since eeratm clearly stated that he and his partners purchased and rehabbed the property with the intent to sell for profit, this property does not qualify to participate in a 1031 exchange. It does not meet the investment or business property criteria for a 1031 exchange.
Instead, this property -- acquired with the intent to resell to customers -- meets the definition of dealer realty.
Hey Newkid,
Could you give me an explanation of why this is not available for a 1031. I was under the impression that if we took the profit and put it into a like property within a certain time period then the 1031 would work. Thanks for the help.[ Edited by eeratm on Date 10/13/2004 ]
This is a gray area of the law. In theory, it is possible to do a 1031 immediatly. The key here is that you have to show that you intended to hold the property long term as an investment.
Starker Exchange's advise is that the property must be put into service (rented) for at least one year. That means that if you fix it up for 6 months and then rent it for only 6 months they aren't as comfortable with it.
You can do whatever you want but if you get audited, you'll have to convince the IRS guy/gal that when you bought it you really were planning to keep it.
eeratm,
The IRS defines investment property as property used for the production of income or held for future appreciation.
The IRS defines a dealer disposition as ANY disposition of real property held primarily for sale to customers.
The IRS excludes dealer realty from eligibility to participate in a 1031 exchange. Instead, dealer realty is treated as merchandise to your business. No depreciation expense is allowed, all your profit on the sale is taxable in the year of the sale, and you are ineligible for 1031 exchange participation and installment sale tax treatment.
Just because you are making a profit that you will rollover into your next acquisition does not automatically qualify your deal for a 1031 exchange.
As myfrogger suggested, the issue is one of intent and intent is difficult to prove. Especially so, in tax court, when the IRS is presumed correct, you have to prove that your intent was a qualified investment use.