Tax Consequences When Flipping Pre Construction Properties

Today a lot of people are buying pre-construction properties and flipping them. A question I get asked many many times are the tax consequences involved when you do this. In an article by Ilyce Glink for Inman Real Estate News the question was answered the following way. The question uses an example of an initial $10,000 payment and an additional deposit of 15 percent due in August.

If you make a profit by selling something that you own, you have a taxable gain. Just what kind of gain hinges on the question of what it is that you bought and when you are considered to have made the purchase under tax law.

If the initial $10,000 payment buys you a transferable contract or an option to buy the property, then your holding period begins with that payment. If you do not have a transferable contract or option until you make the 15 percent down payment in August, then your holding period begins with that payment. If you do not have a transferable option to buy until some time after August, then your holding period will begin at the point that you have a transferable option to buy.

In any case, if you sell your transferable contract or option to buy less than 12 months after you obtained it, any gain will be a short-term capital gain, taxable at your top ordinary income rate. If you sell your transferable contract or option to buy more than 12 months after it was signed, any gain may be considered a long-term capital gain taxable at the 15 percent capital gains tax rate.

Of course, if your contract or option to buy is not transferable prior to completion of construction, then your holding period does not start until you close on the purchase of either condo.

For more information, you might want to check out IRS Reg §1.1234-1, "Options to Buy or Sell," which is available for free at www.irs.gov. As the regulation explains, capital gains tax rates apply to capital assets, and real estate is considered a capital asset.

However an option to purchase real estate might or might not be considered a capital asset. Much will depend on the terms of the document you have signed and the rights it does and does not give you. What many pre-construction buyers don't realize is that often, developers will write contracts that prohibit you from assigning your rights under the contract.

The characterization of your right to buy is going to be the determining factor in finding out whether long-term gains are achieved when you signed the contract or whether you have to wait until you close on the purchase of the units.

As always, each taxpayer's position is unique and any advice offered here is by necessity, general and educational in nature. You should consult a tax professional for advice specifically tailored to this particular situation.

Amit Bhuta
Real Estate Helper
Kendall Village Homes
(305) 439-3031
www.DadeCountyMLS.com