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 Dear
Tax Talk:
I purchased a lot to build town houses on. I plan to sell
them once they are completed. I know that I need to own a property for a year
to take advantage of the 15 percent rate, but when does the clock start ticking:
when I purchased the lot or when the buildings are completed?
--Bob
 Dear
Bob,
To qualify for the 15 percent long-term capital
gains rate, the property sold has to be considered
a capital asset in your hands. Property held for
investment clearly qualifies as a capital asset.
But the construction and sale of several town
houses may be borderline. A real estate developer
recognizes ordinary income from the development
and sale of properties. An individual who builds
one or two homes a year on a speculative basis
may also qualify the sale as a capital asset.
Since the tax impact is significant, I suggest
you discuss the matter with a qualified CPA.
Let's assume you qualify for capital
gain treatment. Your holding period for preferential
long-term capital gains rates is proportionate
to the amount of value added prior to one year
before the sale. For example, if you bought the
lot on May 1, 2007 and had 50 percent of the value
of the units completed by Aug. 1, 2007 and you
sold the units on Aug. 2, 2008, half of the gain
would be long-term.
An alternate
strategy to possibly guarantee long-term capital gains treatment would be to lease
the units for one year prior to their sale. Under this strategy you could probably
qualify the whole thing as long-term capital gain treatment, depending on all
your activities. You should discuss this with a CPA. | 
