ST Gain? LT Gain?

[Hoosier]

Taxpayer purchases a lot on 7/1/2019. Builds house on the lot in the summer of 2020 and sells the lot/house in December 2020. Not a residence, purchased and sold as an investment at a gain of $25k. Since the lot was purchased over one year before the final sale, could this transaction be considered a long term gain?

[TaxGuyBill]

I would think it would be reported as two separate transactions; one for the land and one for the building.

Although your sale would probably be reported on 8949/Schedule D, the Instructions for Form 4797 make it clear that land and the building are two separate items and would be entered as separate sales. I would think the same would apply to your situation.

[terryats]

Just thinking out loud. TP buys investment property, adds a capital improvement. Sells investment held over one year, LT capital gains

[Anarchrist]

Just thinking out loud. TP buys investment property, adds a capital improvement. Sells investment held over one year, LT capital gains

Yes, on the land, not on the capital improvement

[BOB W]

Just thinking out loud. TP buys investment property, adds a capital improvement. Sells investment held over one year, LT capital gains

I agree:

I believe the land is treated like inventory and is the starting date to calculate LT treatment. All Improvements are attached to land date.

[rbynaker]

See if you can find Rev. Rul. 75-524. The building will have its own holding period (and it's possible that certain components of the building may have their own holding periods as well) so you'll likely have a messy split between ST and LT holding periods.

There was a discussion last year in the Intuit Community that might be a good starting point:

https://proconnect.intuit.com/community/proseries-tax-discussions/discussion/long-term-gain-vs-short-term-gain-on-investment-real-estate/00/90897

Rick

[Anarchrist]

I believe the land is treated like inventory and is the starting date to calculate LT treatment. All Improvements are attached to land date.

Sale of inventory is ordinary income, not capital gain.


RUSSO v. COMMISSIONER

https://www.leagle.com/decision/197720368ltc1351192

"Since the sale occurred on December 31, 1971, the petitioner must show that as of June 29, 1971, the seller owned both the land and the completed building in order to qualify all of the proceeds for long-term capital gain treatment."

"an apportionment should be made of the basis of the building attributable to work completed more than 6 months prior to the sale. That percentage would then be applied to the total amount of the gain to determine the portion thereof which was long-term capital gain.

Rev. Rul. 75-524
"In Fred Draper, 32 T.C. 545 (1959), acq. on another issue, 1960-2 C.B. 4, the Tax Court of the United States held that, for purposes of section 117(j) of the Internal Revenue Code of 1939, corresponding to section 1231 of the 1954 Code, the holding period of an asset begins on the date of acquisition and that such acquisition occurs progressively, in the case of a building under construction, as construction (erection) of the building is completed. Accordingly, the portion of the building sold by the taxpayer that was actually completed more than 6 months prior to the date of sale is held for more than 6 months for purposes of section 1231 of the Code."

Since the construction of the building commenced within 12 months of the sale, none of it is ltcg. The land sale is ltcg.