Avoiding short-term gain on new property
I have a preconstruction contract for the purchase of a condominium
that I contracted for over a year ago. Now I have to close, but
I don't want the unit so I want to sell it. If I sell the unit,
do I have long-term gain or short? The contract is in my name or
an entity that I control, so I can't sell the contract.
I assume you stand to gain some money from this and, if it is substantial, then you definitely want to shelter the gain as long-term. Long-term capital gain is taxed at 15 percent while short-term capital gain is taxed at ordinary income rates, which can be as high as 35 percent. Unfortunately, though, since you can't sell the contract, your holding period starts over when you close on the condominium.
Publication 550 states:
To figure how long you have held real property bought under an unconditional contract, begin counting on the day after you received title to it or on the day after you took possession of it and assumed the burdens and privileges of ownership, whichever happened first. However, taking delivery or possession of real property under an option agreement is not enough to start the holding period. The holding period cannot start until there is an actual contract of sale. The holding period of the seller cannot end before that time.
This means you cannot tack on the time that you held the contract since that is a different property: a contract interest versus a title interest. This is kind of unfair since all the appreciation you will realize is from the time you held the contract, which is over the one-year qualification for long-term gain.
However, if the gain is substantial, you may want to consider structuring a deal with a closely held entity to realize long-term gain. Since under the terms of the contract you can only assign the contract to an entity you control, you'll have to have the right structure in place to obtain the long-term gain. A qualified CPA or tax attorney can help you set up the right structure, as there are very complex rules and regulations that will have to be adhered to in order to obtain the desired result.