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Discussion Forum Index --> Tax Questions --> Sub S real estate investor/developer
Sweetp (talk|edits) said:
| 18 February 2007
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| I have a one owner real estate investor. He 1031 exchanged rental properties for raw land 5 years ago. He has subsequently subdivided into lots and is selling them. In reading, I am confused. Are the first 5 capital gains and subsequent sales 5% ordinary income, or are all sales ordinary income as that is what the corporation is doing now?
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Kevinh5 (talk|edits) said:
| 18 February 2007
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| have you tracked the unrecaptured §1250 gain, or were these rentals once §1245 property?
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FTF65 (talk|edits) said:
| February 18, 2007
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| Assuming that you meet the other criteria of Sec. 1237(a) (note: this section does not apply to C corporations, so presumably you are an S Corporation?), the 5% rule applies to all sales that occur in the year in which the 6th sale occurs. For example, if you sell 6 lots in year 2006, 5% of each lot must be characterized as ordinary. If you sell 4 lots in 2006 and 2 lots in 2007, both of the 2007 sales are subject to the 5% rule. As far as the unrecaptured 1250 gain (if any) that was deferred on the exchange, this is generally recaptured when the replacement property is sold [note: there are currently no provisions in the code or regulations which require unrecaptured 1250 gain to be recognized in this situation; however, because the tax attributes of the relinquished property carry over to the replacement property it is a logical (albeit conservative) interpretation of the rules under Sec. 1(h) - most practitioners follow this course.]
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Sweetp (talk|edits) said:
| 18 February 2007
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| This client (Sub-S)DID have other lots for sale outside of this tract, and sold them in '06. I am worried he cannot use capital gains, but must include in ordinary income. This is a big question; his profit on the sub-divided land were $500K in '06, but potentially $240 Million in succeeding years. It is a situation unvisited by me before, and I am just not confident in my interpretation.
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Glmpllc (talk|edits) said:
| 18 February 2007
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| Sweetp...(feels funny saying that on this board)...for the dollars involved, get help immediately. By your post, you are concerned that your client has a trade or business creating ordinary income. Maybe he is, maybe not...I certainly can't tell from your facts. But the tax dollars involved are potentiall HUGE...even for 2006, the difference is significant enough to spend the time and money to get a tax opinion. If there is a trade or business, maybe something can be done now...I guarantee you that you'll have a much harder time solving the problem (if there is one) after the fact.
good luck
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FTF65 (talk|edits) said:
| February 18, 2007
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| It sounds like you are outside of Sec. 1237. Your question is now one of "dealer vs. investor." Although it is possible for a dealer to also hold real property for investment, the fact that your client is a dealer in other activities makes it imperative that you do a thorough job of documentating your investment intent. Based on your facts, it sounds like you may be a little (or even a lot) behind in this department -- as GLMP says, seek immediate help from someone competent in this area.
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Sweetp (talk|edits) said:
| 19 February 2007
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| Thank you. I think I will refer him. I am also thinking it is outside of Sec. 1237 (or at least on the edge!). He has been my client for 20 years, bumbling along with rental houses, and now he has 'made' it. It is heartwarming to see, but I certainly do not want him to come to any harm because of my inexperience in this area. I did write this same problem to Kiplinger Tax Letter editors. I will be interested in their response. - and, Glmplic - Sweet P. is the name of my one-year-old little girl potbellied pig....
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