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What is the current rate of paying capital gains on an investment home?

Are there any tax strategies for dividing home ownership to reduce capital gains on sale of spec home?

  • I built a spec house which has been on the market since August. I was informed that in order to receive the long term capital gains rate, the holding period started the moment I put the house up for sale (not when I acquired the land to build it on). I was wondering if there are any tax strategies for reducing the capital gains by as much as possible. Any loopholes? Could I possibly transfer 50% ownership to a relative to reduce the tax when the house is sold. If so, how would I go about doing this. Also what repayment methods if any exist for him to repay me the profit on his 50%? Another question, would transferring ownership of the house to business entities like an LLC reduce the tax. Also, I anticipate the capital gains tax will rise in 2013. Is there any way for me to prepay taxes at the current 15% rate before the house sells, or any method to avoid paying the gains at the 2013 rate if it's sold in 2013?

  • Answer:

    The relative will be entitled to half of thr profit and have to pay tax on that income. SO unless you have an awesome relative that wants to pay your taxes but then give you all the money, that doesn't work. He would not in any way be legally obligated to pay you back the profits, unless you had a contract stating they were never really his, in whihc case you would be blatantly committing tax fraud. If you sell in 2013, you owe 2013 cap gains rates.

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Neither of your ideas to avoid tax will work. The idea of giving part of the house to a relative, and then having him repay you the profit, is a step transaction. A step transaction is one or more prearranged transactions which have little or no economic substance other than tax avoidance. People think up all kinds of step transactions. The IRS has the authority to simply ignore step transactions. Consequently, you would still be taxed on the full gain. Transferring the home to an LLC would not reduce any tax due, and depending on the LLC entity election, could even increase the tax. On another issue, if you do this regularly the houses would not be eligible for capital gains treatment. You would be in the construction business, and the houses would be considered inventory.

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The date the occupancy license was granted is the date you use for the house. And no, you can't transfer ownership to someone else to avoid paying capital gains. Doing so would cause you to owe gift tax and simply move the taxation to the recipient of the gift. (And they would get to keep the money.) As for creating an LLC, dream on. That won't fix it either. And no, you can't claim you sold the house in 2012 if you didn't sell it at all.

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I find installment sales are a better way to sell the property gifting some of it to a relative would be considered in your lifetime estate and if the Bush acts are not extended, that limit will go from $5 Mil to $1 Mil, and the half of the house might not be wise and forming an LLC with your investment is still your money, if the LLC has to pay taxes, it is still your money

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