Tax Guru – Ker$tetter Letter

Q:

I have a question that I have gotten many different answers on.  I bought my 1st investment property on March 15th (it was a pre-construction home and that is the date of the closing).  I am selling the property and it will be closing on May 4th.  I was told that 6 weeks is too short of a time period to hold a property to be exchanged.   I was told also that it could be done, but it is a very high risk and if you get caught there are penalties to pay.

I also am considering starting a small business (C corp) to funnel the sale through the corporation and then I can also re-invest the money and claim some expenses.  I am new at this and could use some advice. 

Thanks in advance for any info you can give me.  I live in the state of Florida and the investment property is also in Florida.

Thank You,

A:

There is no minimum holding period for property that is involved in a 1031 exchange.

What is a potential concern is if you start doing a lot of rapid purchases and sales and you or your corporation do nothing but that.  That would make you a real estate dealer, with the properties considered to be inventory.  Dealers are not allowed to use any of the tax saving techniques that investors can, such  as Section 1031, installment sales, or the special lower capital gains tax rates.  In addition, profits are subject to the additional 15.3% self employment tax.  There is no statutory explicit number of deals that will classify someone as a dealer.  It is a very gray area in taxation and should be addressed with a tax pro who knows how to avoid the dealer tag.

Using a corporation has a lot of tax saving potential.  However, it is not a do-it-yourself area.  You need to consult with a tax pro who understands how to best utilize them in order to avoid the common and very costly mistakes that people constantly make when going it alone.

Good luck.

Kerry Kerstetter