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Land Subdivision

Let's suppose I purchase a parcel of land for $1 million and subdivide the same into 5 lots. My understanding is that if I was then to sell each of those lots for $300K each, I would pay ordinary income on the gain of $500,000. However, let's suppose that I create 5 seperate LLCs and sell each of the lots to 1 of my LLCs for $200K. My profit is now nothing. Now, each of those LLCs sells each of their respective parcles (which the LLC purchased for $200K) to another buyer for $300K, 1 year later. Is this taxable as a capital gain?

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Reply to
eglazier
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If you hold the property for 5 years and meet certain other requirements, section 1237 of the Internal Revenue Code permits you to treat the gain as long-term capital gain provided you subdivide the land into 5 or fewer parcels. The arrangement you are contemplating above of transferring ownership from yourself to LLC entities owned by you gets you ensnared in the related party rules found in section 267 of the Internal Revenue Code. Frederick Lorca

Reply to
Frederick Lorca

Form over Function: the IRS will look through the transactions.

If you buy the land, wait over a year, and sell it, that's probably long term capital gains (unless you're in the real estate business). A method that shouldn't work: set up the corporations now (funded mainly with $200,000 IOUs). A year from now, buy the land, and sell parcels to the corporations at cost (paid for with their IOUs). Then you can sell the corporations themselves immediately; since you've owned the stock over a year, that's long term capital gains. Seth

Reply to
Seth Breidbart

of course. Unless you are a dealer, in which case it is ordinary income. If it qualifies for capital gain treatment, consider whether it qualifies for 1031 exchange treatment.

Reply to
Gil Faver

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