 Real
estate investments and capital gains taxes
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 Dear
Tax Talk,
I recently bought an investment property. For
the last month or so, I've been fixing it up. Originally, my plan
was to resell it when I finished with the renovations (probably
within four to five months), but now I'm reconsidering. I have several
questions regarding capital gains taxes on real estate investments:
1. If I resell in less than a year, will I be subject
to short-term capital gains taxes or are all real estate investment
gains taxed at the same rate regardless of how long the property
is held?
2. With the 1031 exchange of like property, if I sell
this property within a year (say seven months) and buy another property
of like kind within the specified time-frame, and then sell that
one within a year of purchase (say another seven months), how are
the gains taxed? Would I add together the time I held the two properties
to determine short-term vs. long-term gains, or would I simply look
at the length of time I held the last investment?
-- K.L.
 Dear
K.L.,
Gain on the sale of real property is categorized
between long term and short term based on the date it is acquired
and the date it is sold, just the same as stocks and bonds. If you
sell the property within five months of purchasing it, you will
have a short-term capital gain. Short-term capital gains are taxed
at the same rate as ordinary income, which can be as high as 35
percent. Long-term gains are taxed at the maximum rate of 15 percent.
A long-term gain is gain on the sale of property held for more than
one year (that is, one year and a day).
The holding period of property acquired in a like-kind
exchange dates back to the date of the exchanged property. That
is, if you exchange the renovated property for similar property
and later sell the second property, you would use the date you acquired
the first property to determine your holding period and whether
the gain would be long or short term. As you said, you would add
together the time you held both properties.
You could also get long-term gain treatment if you
defer the sale of the first property by entering into a delayed
closing with the prospective buyer. For example, you can give the
buyer a lease option that could be exercised after you meet the
one-year requirement.
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