Forcing STCGains

[Snaggletooth]

Real Estate Professional/Developer buys some 15 properties per year on the average.
Some are just unimproved land, some are partially developed, some are buildings to be refurbished.

When he sells, sometimes this occurs with him making no further investment in the property to further develop, repair, or build.

It might be argued, but I tell him consistently he cannot take long-term capital gains rates when he sells these properties. However, in order to properly calculate the tax return, I still enter the purchase date (often longer than one year) and the sales date, but then use a software feature which allows me to "force" short-term gains in spite of the dates. The tax return shows dates of holding longer than one year, but in the short-term section.

Not sure whether this may result in a conflict - i.e. whether someone at IRS reading the return, or maybe some data comparisons, will intercept this apparent conflict and create a notice to the taxpayer that an error has been made. Such an IRS notice might even offer my client a refund.

Those of you who may have special knowledge - comments??

[taxxcpa]

Real estate developer

Would it even be a capital asset at all? If he is a developer, and is only holding it temporarily to sell, it might be an inventory item.

[Burke]

Taxcpa is correct. "Generally, real estate held primarily for sale to customers in the ordinary course of the taxpayer's business is an ordinary asset (rather than a capital asset or an IRC #1231 asset. See P. 12,214.31 and 12,314 et seq." There is no reason to force STG on Sche D, because these are treated as COGS and do not show up there. Sales are treated as ordinary income and cost of properties are reflected on Sche C, 1065, or 1120S depending on entity, and treated as inventory items. IRC 1237 allows for certain favorable treatment under limited conditions for persons who are not dealers and have held property for 5 yrs, among other requirements, which would not apply in this case.

[BOB W]

Ordinary income subject to SE.

If the client rents these units for a year or more, thus converting them to rental properties, he can get LT CG on the sale. 15% is alot better than ordinary tax rates.

Of course, now you get into when is property considered "Available for rent" as apposed to have acutally have rented it.