One of my high income clients is a developer of residential property. He is 100% owner of S-corp.
Corporation buys typically 30-40 acres of unimproved land, then develops with pavement, drainage and sewerage, and may build and sell 15 - 20 homes over the course of a couple years. Corporation always owns 3-4 such tracts which they have bought for future development, enough backlog of tracts to last 7-8 years.
What if one of these tracts is sold while still in an unimproved state? Example: Bulldozer, Inc. buys 20 acres of Gullible Gulch in 2006. In 2009, the nearby town announces the relocation of a hospital close to this property, and rezones the Gulch to commercial status. Bulldozer develops residential property only and has no interest of getting into the commercial market.
Bulldozer, Inc. then sells Gullible Gulch to a commercial developer, who is obviously now interested. Bulldozer's orginal basis is $50,000 and because of the rezoning, the buyer is willing to $250,000 for the property. Bulldozer's president says if he kept the property and built houses, he would scarcely clear a $200,000 profit on the houses, so he sells the Gulch in 2009.
Question: Bulldozer (remember is an S corp, not a C corp) thinks the $200,000 gain qualifies for capital gains since the property turned out to be "investment" property. What about the denial of capital gains because Bulldozer might be treated as a "dealer" instead of "investor?" In grey areas, I tend to support my client, and think Capital gains would be appropriate.
Corporation buys typically 30-40 acres of unimproved land, then develops with pavement, drainage and sewerage, and may build and sell 15 - 20 homes over the course of a couple years. Corporation always owns 3-4 such tracts which they have bought for future development, enough backlog of tracts to last 7-8 years.
What if one of these tracts is sold while still in an unimproved state? Example: Bulldozer, Inc. buys 20 acres of Gullible Gulch in 2006. In 2009, the nearby town announces the relocation of a hospital close to this property, and rezones the Gulch to commercial status. Bulldozer develops residential property only and has no interest of getting into the commercial market.
Bulldozer, Inc. then sells Gullible Gulch to a commercial developer, who is obviously now interested. Bulldozer's orginal basis is $50,000 and because of the rezoning, the buyer is willing to $250,000 for the property. Bulldozer's president says if he kept the property and built houses, he would scarcely clear a $200,000 profit on the houses, so he sells the Gulch in 2009.
Question: Bulldozer (remember is an S corp, not a C corp) thinks the $200,000 gain qualifies for capital gains since the property turned out to be "investment" property. What about the denial of capital gains because Bulldozer might be treated as a "dealer" instead of "investor?" In grey areas, I tend to support my client, and think Capital gains would be appropriate.
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