Posted by Nate(DC) on November 06, 2002 at 01:05:47:
Appraised value is irrelevant.
Capital gain is computed the difference between your basis (i.e. what you paid) and your sales price.
Here, your basis is $100,000 and your sales price is $725,000, so you would have a $625,000 capital gain. It would be a short term capital gain, taxed as ordinary income, because you did not hold the property for at least a year before selling it.
Here’s a thought. I am assuming this is the same deal you just referenced, where you are buying 3 properties from the same seller and flipping two of them immediately. Since the seller is the same for all 3 parcels, and the pieces you’re flipping are (arguably) worth $950,000, why not see if the seller would rework the contract to sell you the two pieces that you’re going to flip for $950,000 and the other piece for $850,000. He still gets his $1.8 million; you get a capital LOSS (tax benefit) since you’re buying for $950,000 and selling for $725,000, and since you have an appraisal to support the $950,000 sales price, it might survive an audit.
Of course, if there’s financing considerations, this won’t work as easily, but just something to think about.
Posted by Heather on November 05, 2002 at 23:54:51:
And also,
If I purchase 3 adjoining properties at
1.8 mil divided as: two for $100k and one for $1.7 mil.
And the appraised value of the two properties for $100K is $950,000 and I then immediately resell in sub escrow for $725,000 will I still incur a capital gain?
Because technically I have bought the two properties for $100K and resold for $725K. Although the buying and selling would occur almost simultaneously, with the property passing right thru my escrow into anothers.
Posted by Diane (TX) on November 06, 2002 at 17:42:23:
Actually, Heather, I’d consider it ordinary income, because the quick flip shows that this is dealer property. That means self-employment tax on top of the income tax hit.
It sounds as if you’re subjecting yourself to unnecessary current tax because you’re not allocating the sales price correctly. If you’re selling the two parcels for $725,000, have your sales agreement say $725K. (Although if these are unimproved lots, you may be required to allocate based on the appraised values.)
Shell out some cash and get qualified professional advice. Proper structuring will solve many problems.