– The owner of appreciated land might face a large tax bill upon developing and selling the land, as the entire profit would be treated as high-taxed ordinary income.
– To potentially save on taxes, the owner can use a strategy that allows for favorable long-term capital gain tax treatment on the pre-development appreciation in the land value.
– The strategy involves establishing an S corporation to function as the developer, which may result in paying a smaller tax bill on real estate development profits. – The S corp can purchase the appreciated land from the owner for a price equal to the land’s pre-development fair market value.
– The sale to the S corp will trigger a long-term capital gain eligible for a lower tax rate as long as the land was held for investment and owned for over a year.
– The S corp will subdivide, develop, and sell off the property, with the profits being passed through to the owner as higher-taxed ordinary income and lower-taxed long-term capital gains.
– This strategy allows for favorable tax treatment of the land’s pre-development appreciation, resulting in potential tax savings.
– For more information or questions, contact taxinsights@nksfb.com or Richard Welling at rwelling@nksfb.com.
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