Pre-Construction & Capital Gains
We are considering purchasing a home in the pre-construction phase. We know that Capital Gains goes down significantly after one year...but is that from the date of deposit (before building) or date of closing?
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Jeff & Emily
[ Edited by jandewhite on Date 08/30/2004 ]
date of closing. when you actually own the prop....km
can i add on to the op's question?
I am doing my first pre-construction deal. I bought the lot in June and I am using one of those $1000 down on your lot builders and the house will take about 12-15 months to finish they say. So, that means when i sell it it will be over 1 year since I bought the lot (closed on the lot) so does the capital gains go on the lot ? or on the close of the construction on the house? or on both somehow? I am thinking about selling the house or renting it possibly after completion.
I really need to avoid capital gains and could 1031 into another property to continue delaying taxes.
thank you
It's capital gains. CLock starts ticking at time of deposit.
In general, everything owned for personal or investment purposes is a capital asset. Of course there are exceptions but a pre-construction contract doesn't fall in the list of exceptions assuming that you are not in the business of buying and selling these contracts.
See IRS Pub 544, Sales and Other Dispositions of Assets for more detail on capital asset exceptions.
Report your sale on Schedule D as you would the sale of a stock option.
It's capital gains. CLock starts ticking at time of deposit.
In general, everything owned for personal or investment purposes is a capital asset. Of course there are exceptions but a pre-construction contract doesn't fall in the list of exceptions assuming that you are not in the business of buying and selling these contracts.
See IRS Pub 544, Sales and Other Dispositions of Assets for more detail on capital asset exceptions.
Report your sale on Schedule D as you would the sale of a stock option.
I bought one of these pre-construction condos in florida a few months ago. It is scheduled to be done in June/July and I am trying to figure out what to do with it. They are already selling the same unit in worse locations for $20,000 more and counting (hopefully It will actually continue and I will profit). I read the IRS section, but all I see about the real estate is that it seems to say the clock starts ticking when It says you "Own" the property. See Table 4.2 "Day after you receive title to the property" Can this still be considered to occur upon deposit or only upon closing? I would love to save on Capital gains, I wouldnt want the IRS knocking on my door.
Thanks!
How does builder price increases work on new SFH's? I 'm currently building a new home and the builder has increase the price of our model by 10K over the past several weeks will this mean that when our house is appraised at closing it will be worth 10K more than we paid? Also if we have upgrades will any of them apply to the appraised value since so many appraisers only look at the outside? Thanks
That is my understanding. A friend of mine lives in the same development as I bought my condo in, and when he closed on his house, it had been appraised at $50,000 more than he had paid. I think its fairly easy to do the appraisal that way because you have a direct comparison with a currently selling property. Upgrades I am pretty sure are added to the base cost.[ Edited by bumpnjump01 on Date 09/28/2004 ]
"It's capital gains. CLock starts ticking at time of deposit. "
Nope, you must take ownership.
bumpnjump01
the point is that a pre-construction contract itself (!) is considered a capital asset. thus, long-term cap gains if you hold it more than 12 months.
I am new and this is interesting. I think fenrir is off on this one. Isn't an option or contract to purchase taxable only if exercised and the basis is set in the final disposition (in this case closing) ....and doesn't that go for time and money? The only exception that I know of is a mark-to-market type option where someone has an interest in taking gains or losses over the holding period (before any exercise or maturity) and thus re-adjusting the basis with each mark. Though you hold equitable title at deposit, isn't it true that you set basis at closing? For tax purposes, you own when you close, isn't that fundamental? I thought the option is personal property and the downpayment $ is not at issue (hence escrow).
Hi Bricks
I am prepared to take bets
A pre-con contract has similarity with a stock option and it hasn't. You don't have the right (option !) to buy, you are obligated to buy. Could you always get out if you had to ? Yes but it depends on the developer. He could insist on execution.
At any rate, I am saying it's a capital asset - and then the rules are clear.
On a stock option, whether you exercise or not (selling at a gain) past 12 months, it's long term cap gains.