Do i enter sale of a spec house under business income or investment income?

Question

I am a self employed carpenter

Answer 1

I would qualify Steven F's good advice by adding something regarding your level of activity involving spec houses. That reference might apply to you if you are deemed to be in the trade or business of building speculative houses. Did you build the house as part of your business as a self-employed carpenter, or is this a separate activity? In other words, does your business normally consist of doing solely carpentry work for others, or does it include building spec houses on an ongoing and regular basis? You might be able to make a case for having a separate activity using your carpentry skills (more appropriately, general contractor skills) in building a spec house occasionally and selling it as investment property. There are a lot of questions that need to be addressed in answering this question, and some may overlap with the "active participation" aspects of the passive activity rules.

Answer 2

If you can, you should enter it under business income first. If your corporation is an S-Corporation, you can avoid double-taxation with the business and personal income. Secondly, and more importantly, you can make a ton of deductions to offest the income as much as possible. Telephone bill? Trip you had for New Year's? We all know it for business purposes.. "cough cough".. Talk to your accountant as see what deductions your company can reasonably make.

After the deductions have been made, the company will then pay you the rest of the money; at least on paper. This remaining amount will be then added to your annual income for that fiscal year, and that new, lower amount will be taxed as personal income at whatever rate applies to it. However, since you are self-employed, your 1040 allows you to make an other hand-full worth of itemized deductions or claim a number of other things as expenses to offset your income from that year. Talk to an Accountant on this one, or a local Tax Attorney who can help you out on this one. If it's a lot of money, that's more reason to go hunting for someone fast!

Next time, if you are thinking of selling a house for investment, and planning to re-invest the money in an other house; do what is known as a "tax free exchange" or an "estate trade", depending on your state, it may be called many things; but ALL Real Estate Brokers, Accountants, Attorneys, know what a "tax free exchange is". The taxes are defered, and you don't have to pay them until you realize any capital gains from the sale of your "other, new" property! Pretty good deal if this is what you do for a living!

Now it's too late, at least in New York State. Check with your Real Estate Professional on this one, have it in mind for next time, it could end up saving you alot of money!

Hope this was informative and helpful. Best of Luck.

Answer 3

I hope Angelo L is lying about being a tax attorney. His advise suggests "questionable deductions". It also has ZERO resemblance to the IRS answer to your question.