How Do Taxes Work When You Sell A Spec?

ruskent

So if I build a spec house, sell it, and make 100k, am I taxed on that 100k the same ways as when I make 100k laying pavers? Or are there different laws for real estate?

genecarp

in most cases, yes, there are many things that dictate tax impact, going in, you need to have a GREAT accountant on board, the way things are set up at the begining will either help you, or hurt you, did i mention a GREAT ACCOUNTANT?

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LNG24

Gene said it best, but I'll second him...GREAT ACCOUNTANT. And keep receipts. Everything! Every Penny. Every Lunch bought. Every Screw. Every tool, nut bolt, dime paid to anyone and everyone.

Now with that said...ARE YOU CRAZY!!!! Spec House in this market?

Did you just read that new home starts are up 8% nation wide. Sounds great, but they are DOWN about 50% overall! Now is a great time to acquire property, but not build! Our inventory levels are way too high, mortgages are Very Difficult to obtain right now even for perfect credit.

http://www.usatoday.com/money/econom...rts-gain_N.htm

Unless you have very deep pockets and can float the house for up to a year. Do not start a Spec. Buy some land and sell a TBB (To Be Built) Once you have a buyer in contract...break ground. Anything else is just crazy. And thats coming from me wearing my Real Estate Broker hat.

Oh, one last thing. I hope you were just throwing out $100k. You will have a difficult time hitting that margin with one spec house. Maybe on a sub division, but not just one house today.

ruskent

I was going to build cash.

Have you looked at the new construction houses that are sitting on the market right now? I have. And its no wonder they can not sell them. Its the same ugly houses over and over and over. You do not need to spend a ton of $ to build a house that actually looks good!

Think about what i am really in business doing. I create curb appeal. I might be incredible arrogant, but I am confident I could build a house and sell it in this market because i know what looks good.

Heck, just consulting with a landscape archeict on house placement on the lot could drastically change the way the house looks from the road!

thom

Good for you Ruskent.

I built specs until I recently retired. They look way better and are way better built than the standard tract crap we see around here.

As for your question, yes, you pay taxes on the earnings just the same. Just make sure you take advantage of every business expense possible.

A big one most guys miss. Buy lunch for your crew, every day, on the jobsite. They consider it an added benefit. The real benefit is to you. The guys don't spend a half hour picking up the tools and another half hour getting them out so they don't get stolen over lunch. Everyone's back to work on time. You can talk to the entire crew during lunch. The whole lunch cost is fully deductible because it serves a legitimate business purpose.

jmic

Give it all the curb appeal you want. The question is will it appraise for what your market will bear ?

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ruskent

jmic It does not neccessarily cost more to build a house that looks good. Some houses look bad for just akward window placement.

LNG24

Matt, I'll show you gorgeous homes with magnificent landscaping and THEY are sitting on the market. I am not saying you can't do it. Or that you don't know what would look good, but there is far more to building AND selling a home than Good Looks.

I can build the best damn house out there, but if someone can not get a mortgage to buy it, then what good is it. I'll be happy to have a fellow agent spend some time with you showing you the market stats for the area you want to build. You build whats selling. Not what looks good. I can sell a ton of $275k homes right now because those are the people that are out there buying. I can bring you over to Connecticut and show you the most gorgeous 1 million dollar home you ever saw. Its been on the market over a year now. Can't move it and they are going to have to take a LOSS to get out from under it. Toll Bros. is trying to dump inventory around here just like everywhere else. They have seen a turn around in Naples. FYI: Naples was the first market to tank. It looks like its the first to recover if it can show another quarter of increases.

If you have cash to build the home. Go acquire some land. As much as you can in good locations. Then Sit and wait. When the market recovers, you will have dozens of builders looking for land to build on. Then name your price.

I've got 71 acres on the market right now. 71 ACRES! for $350k. That should be selling for $500k. 2 acre zoning. Great property, has a challenging entrance, thats it. Have another deal in the works on a few hundred acres across the river. Builder went belly up. Municipal water and sewer is in place (the districts that is and the facilities, not the lines) Going to make someone a good chuck of change if we can get the banks out of the way.

All of these are a minimum of 3 years from doing anything. Otherwise, if you have that much cash lying around. Look for some multi family or commercial buildings and parlay it into a nice income.

BKFranks

If you roll the profits into a more expensive house you can defer the taxes.

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Electricmanscot

Back to the original question.

Basically how it works is like this, you put up the dough, you do all the work, you deal with all the headaches, you make the sale, the government comes in and gives it to you right in the kiester. Bend over sucker.

genecarp

i built, and sold 4 within the last two years, using that philosophy. i am sitting on one right now. inventory is high, and i am not the only one with special homes for sale.

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joasis

The specs I build are entry level homes....paint grade basic.....no crown, no upscale anything. And they sell. 1200+ sq/ft with a garage if the lot allows sells quickly.

As for the capital gains from a sale, the bottom line is not just in accounting, but profit, and if you hide the profit, the risk is great. Take every deduction that is legal and then pay up....you make 100k, you will be giving 30k or so to taxes.....yes, it sucks, but the alternatives suck as well.

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ruskent

I know I have to pay taxes. I was just not aware of if it was at the same rate as any other income.


The goverment almost makes you want to be alittle less successful!

LNG24

actually you want to make as much as possible and figure out how to defer. The game is...and sorry for how horrible it sounds...Defer until your dead. Then who ever inherits the estate can take a step up basis.

zziptie

lets keep going with this topic. Can i buy a lot this year, and write it off. Also, could i put a spec on it in 09 and keep the land deduction in 08?

cleveman

No, land doesn't depreciate.

No, because you can't have a "deduction" in '08.

Can I interest you in a tractor?

SLSTech

Hmmmm, what's you plumber say???






Personally, I would go by the above posters advise & contact an accountant & possibly a lawyer.

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Kgmz

Jeez, where have all you guys been? And talking about deferring and rolling over.

Have you not heard of the Tax Payer Relier Act of 1997?

This is what some of the smart smaller builders are doing. They build a house and live in it for 2 years, then they do it again, and again, and again. If you do this all profit from the house is tax free up to $250,000 if single or $500,000 if married. And this can be on each house there is no aggregate limit.

I have done this and know of several builders that do this. Nice way to make the profit on one of your nicer houses 100% federal tax free every couple of years.

Read this if you want to see how it works.

http://www.bankrate.com/brm/news/rea...20041018a1.asp

resipsa

The IRS has special rules for spec houses. Most expenses related to the house have to be accrued until the house is sold. Hence, you don't necessarily get a deduction in the year incurred. General overhead items may still be deductible in the year incurred. Go to the IRS website and do a search for "spec home rules" and that should find you the info.

boman47k

I thought something similiar to this was being done before 1997 in these parts. Maybe it was a state tax or something, but I remember hearing of it while I was still in textile before '97.