# Capital Gains. How is a Person buying & Selling different than a true Home builder



## TyceCCSU (Jun 15, 2005)

*Capital Gains. How is a Person buying & Selling different than a true Home builder*

To anyone that can answer my question,
I'm interested in how a homebuilder pays for a home using a construction loan, and avoids Capital Gains when he immediately sells the house. Or is this not possible. The essence of the question:

How does "Joe Blow" differentiate from a True Homebuilder when it comes down to building and selling homes

I'm aware that most builders force there customers to fund the project with construction loans. How does a LLC company who buys land, hoists a modular on a foundation, and then sells the home avoid Capital Gains? Is this even possible since the essence of the business is BUILDING homes?

Thank you, 
Tyce


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## bob (Jun 10, 2005)

The point of your question is how do they get arround capital gains. Can a corporation use capital gains tax code? If they are an LLC they pay tax on the amount of profit at the end of the year. 



TyceCCSU said:


> To anyone that can answer my question,
> I'm interested in how a homebuilder pays for a home using a construction loan, and avoids Capital Gains when he immediately sells the house. Or is this not possible. The essence of the question:
> 
> How does "Joe Blow" differentiate from a True Homebuilder when it comes down to building and selling homes
> ...


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## TyceCCSU (Jun 15, 2005)

bob said:


> The point of your question is how do they get arround capital gains. Can a corporation use capital gains tax code? If they are an LLC they pay tax on the amount of profit at the end of the year.



Bob,
Where can I validate this information? If the LLC pays tax on the amount of profit at the end of the year, what % is the LLC paying? Captial Gains for a consumer is 15%.....is there a benefit to the LLC?
T
hanks


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## PipeGuy (Oct 8, 2004)

TyceCCSU said:


> Where can I validate this information?


A good accountant?


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## homebild (Jun 5, 2005)

TyceCCSU said:


> To anyone that can answer my question,
> I'm interested in how a homebuilder pays for a home using a construction loan, and avoids Capital Gains when he immediately sells the house. Or is this not possible. The essence of the question:
> 
> How does "Joe Blow" differentiate from a True Homebuilder when it comes down to building and selling homes
> ...


It is not possible for a builder/Joe Blow to avoid capital gains if he builds the house as a "spec" to sell it unless he moves into it and occupies it as his primary residence for 2 full years. Then this home will have the first $250,000 of gain exempted from taxation if he is single or $500,000 if he is married.

Otherwise there is no way to avoid capital gains.

Even LLCs do not avoid capital gains.

Capital Gain rates depend upon whether the gain is considered a 'short term' gain or a 'long term gain', and for individuals it can vary from between 5% to 25% or higher depending upon your overall tax bracket.

See the IRS links below:

http://search.irs.gov/web/query.htm...&qt=capital+gain&criterias=1a&Go.x=14&Go.y=10


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## TyceCCSU (Jun 15, 2005)

Maybe I didn't make the question clear, I completely understand the ramifications of "Joe Blow" the builder and his contributions  to Uncle Sam.
An LLC is also hit with Capital Gains; HOWEVER there is a benefit for forming an LLC....one benefit being Taxation. The question is, what is the Tax % for the LLC, not for "Joe Blow".




homebild said:


> It is not possible for a builder/Joe Blow to avoid capital gains if he builds the house as a "spec" to sell it unless he moves into it and occupies it as his primary residence for 2 full years. Then this home will have the first $250,000 of gain exempted from taxation if he is single or $500,000 if he is married.
> 
> Otherwise there is no way to avoid capital gains.
> 
> ...


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## homebild (Jun 5, 2005)

TyceCCSU said:


> Maybe I didn't make the question clear, I completely understand the ramifications of "Joe Blow" the builder and his contributions  to Uncle Sam.
> An LLC is also hit with Capital Gains; HOWEVER there is a benefit for forming an LLC....one benefit being Taxation. The question is, what is the Tax % for the LLC, not for "Joe Blow".


Yep, sorry.
But it wasn't clear from your intitial post...at least to me...


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## bergenbldr (Apr 23, 2005)

Far as i know an llc is not taxed directly. Any profit or loss is passed on to the members who treat it as self employment income. The tax rate could be different for each member based on what other income or bussiness related losses they may have. If you want to defer income taxes or avoid self employment taxes,a c-corp. would be a better choice.


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## Mike Finley (Apr 28, 2004)

If you are a builder you are in business and businesses pay taxes on profits you are not involved with capital gains.


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## Teetorbilt (Feb 12, 2004)

Like Mike F said. Capitol gains are not assesed until the (whatever) is sold.


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## Mike Finley (Apr 28, 2004)

Yeah, but Teetor there are no capital gains assessed. Simply business profit.

Selling price of house (Income)
- costs to build and sell (expense)
-----------------------
= Gross Profit

Gross profit - other business expenses = net profit

Federal & State taxes based on net profit.


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## JustaFramer (Jan 21, 2005)

Do it like most contrators I now run a S corp or LLC. Pay yourself a salary and run the business in the red.


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## Grumpy (Oct 8, 2003)

I know a builder. He buys houses and tears 'em down and builds new spec houses. How to avoid capitol gains? Buy the house with a traditional loan and sit on it for awhile. He buys the property under his personal name, not his business name.

He usually sits on the house a year while he gets the prints drawn up, applies for permiting, finishes up his current project(s), etc... Obviously this is costing him some money in interest on the loan but I'm guessing it's still less than capitol gains. I also think that he doesn't buy the property unless he gets a killer deal so it's worth it to buy the house when a deal comes around and sit on it until he's ready.


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## Grumpy (Oct 8, 2003)

JustaFramer said:


> Do it like most contrators I now run a S corp or LLC. Pay yourself a salary and run the business in the red.


That's another way that most builders I have spoken with do it. 

When they are getting ready to start a project they estimate how much they are going to make and pay themselves a monthly/weekly salary slightly higher than their estimated gains.


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## TyceCCSU (Jun 15, 2005)

*Keep up the good work!!*

Gentlemen, 
Thank you for all your input/feedback. ALL of it has helped me tremendously. Good luck to you all on all of your endevours. 

Keep the information coming!

~Tyce~


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## CogentRES (Apr 2, 2005)

If the guy can cover his holding costs this is an excellent strategy. Any investment properties held for more than one year are eligible for a 1031 exchange. This allows the investor to trade the property for more lots, homes ect without paying any capital gains tax. The profit is placed in an escrow account and the investor is given 6 months to reinvest it. 

http://www.irs.gov/businesses/small/industries/article/0,,id=98491,00.html



Grumpy said:


> I know a builder. He buys houses and tears 'em down and builds new spec houses. How to avoid capitol gains? Buy the house with a traditional loan and sit on it for awhile. He buys the property under his personal name, not his business name.
> 
> He usually sits on the house a year while he gets the prints drawn up, applies for permiting, finishes up his current project(s), etc... Obviously this is costing him some money in interest on the loan but I'm guessing it's still less than capitol gains. I also think that he doesn't buy the property unless he gets a killer deal so it's worth it to buy the house when a deal comes around and sit on it until he's ready.


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