Revenooer Rants: Revenooers have it both ways
January 27, 2016
That would be the case, often, when it comes to the travails of real estate "developers." Those folks are typically enamored with capital gains – taxed at a lower rate than ordinary income, as we all know.
But IRS says that developers typically realize ordinary income when they sell their real estate at a gain – because that is the "trade or business" of the developer.
So here comes taxpayer Evans who argued the other side of the coin when he sold his real estate at a loss, and wanted ordinary loss treatment.
"No way" said IRS and the Tax Court, thus saddling Evans with an undesirable capital loss – limited in deductibility, of course, to the extent of other realized capital gains, and thus of little or no value in offsetting other income.
Notwithstanding, in the words of the Court, "that the taxpayer intended to develop" the property.
Our boy, here, was a full-time employee of a real estate development firm, while at the same time purchasing for himself residential real estate properties that he "hoped to either develop for sale or rent to tenants."
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His plan when purchasing properties for development and sale was to tear down the existing structures, construct single or multi-unit residences, then sell those residences for gain.
Alternatively, he could generate income by renting the residences to tenants. Indeed, one property that he bought was lost to foreclosure (a sale for tax purposes), which Evans treated as an ordinary loss.
And indeed he "lost," alright, when the Tax Court sanctioned the Revenooers' capital loss conclusion, looking to the following factors which the Courts have long established:
Nature of the acquisition of the property: Even if Evans acquired the property in question with the intention of developing it, this did not mean that he was in the business of property development and sale. This intention did not dispose of the question of whether he held the property as part of a business of developing and selling properties to customers.
Frequency and continuity of property sales over an extended period: Although Evans estimated that he had invested in eight or nine properties, he specifically identified only two properties and his testimony about the others was too vague to be reliable; the limited record showed that Evans' property sales were sporadic, not frequent and continuous.
Nature and extent of taxpayer's business: Evans held only a few properties for development and sale, and he acquired the properties sporadically; his personal real estate development activities were rather isolated.
Activity of the taxpayer with regard to the property: While the fact that the property in question was sold in a foreclosure sale did not detract from the fact that Evans intended to sell the property, this intention did not answer the question of whether Evans was in the business of selling property.
Extent and substantiality of the taxpayer's transactions: Of the two properties which Evans identified and that were potentially held for development and sale, only one may have produced any income; the Court surmised that Evans' primary source of income was his full-time job and that any income he may have earned from developing properties accounted for an insubstantial portion of his income.
CONSULT YOUR TAX ADVISER – This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation. Jeff Quinn is a CPA, recently retired from the firm of Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He welcomes comments at email@example.com.