Capital gains on developed property

Dear Bob,
To qualify for the 15 percent long-term capital gains rate, the property sold has to be considered a capital asset in your hands. Property held for investment clearly qualifies as a capital asset. But the construction and sale of several town houses may be borderline. A real estate developer recognizes ordinary income from the development and sale of properties. An individual who builds one or two homes a year on a speculative basis may also qualify the sale as a capital asset. Since the tax impact is significant, I suggest you discuss the matter with a qualified CPA.

Let's assume you qualify for capital gain treatment. Your holding period for preferential long-term capital gains rates is proportionate to the amount of value added prior to one year before the sale. For example, if you bought the lot on May 1, 2007 and had 50 percent of the value of the units completed by Aug. 1, 2007 and you sold the units on Aug. 2, 2008, half of the gain would be long-term.

An alternate strategy to possibly guarantee long-term capital gains treatment would be to lease the units for one year prior to their sale. Under this strategy you could probably qualify the whole thing as long-term capital gain treatment, depending on all your activities. You should discuss this with a CPA.