Gene E. Utterback, EA wrote:
- quote -

I stopped short because I don't do returns, don't know that
aspect of it as well as you do, and figured I'd leave that
part up to the experts.

There are, after all some (though admittedly not nearly
enough) lawyers who know our place and the limits of our
knowledge.

Stu

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"John Molinda" <johnmolinda[at]yahoo.com> wrote:

- quote -

As I write this there are 4 other responses posted. The
best answer from those is from Stuart Bronstein, however I
do not believe my esteemed colleague has taken his answer
quite far enough so that you can understand what you need
to.

First, short term capital gains are taxed at ordinary income
rates. Capital gains, short and long term, can be offset by
capital losses, both short and long term.

What your real estate agents and investors are referring to,
and what Mr. Bronstein explained but stopped short of
finishing, is that if you are classified as a "dealer" in
real estate then IRS wants to consider you as operating a
business, likely a Schedule C. This would convert your
gains from capital to ordinary. I know it sounds almost
meaningless but the change is significant.

As a Schedule C dealer in real estate you would report your
sales and costs on Schedule C as a sole proprietor and it
would transfer to page 1 of your 1040 as ordinary income
subject to not only income tax but to self employment tax as
well.

But if you held the property as an investment and were not a
dealer in real estate then the sale price and costs get
reported on Schedule D as capital gains and can be netted
against capital losses.

The answer lies in how you are classified - investor or
dealer.

It would seem to me from the little information you provided
here that you are an investor and your gains should go on
Schedule D and be used to offset your losses from a prior
year. However, you will need to discuss the details of your
circumstances with a professional to make sure you get
classified correctly.

Good luck,
Gene E. Utterback, EA

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"D. Stussy" <kd6lvw[at]bde-arc.ampr.org> wrote:

....skip...

- quote -

Wow! "...no effective difference"...??? The suspended
$147,000 capital loss is not a major difference? The
difference would be the tax on $147,000 of ordinary income!

And besides, if the properties were depreciable, and would
be section 1231 gain if held for more than a year, their
sale after a year or less does, indeed, give you ordinary
income. There is no "short-term" section 1231 gain..

Let's look at the rules...

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D. Stussy <kd6lvw[at]kd6lvw.ampr.org> wrote:
- quote -

I think the question is whether or not the gains from sale
of property will be offset by large schedule D losses. He
was told no, if property sells in under a year it is
ordinary gains.

I think there are two things here:

The short term gains are taxed as ordinary income but might
be in fact capital gains and can be canceled by large
capital losses.

But there could be an issue of whether buying real property,
several time in a year, and selling at a gain puts OP in the
category of a profesioanal dealer in real estate, making
this a schedule C income item and therefore not usable to
cancel out large schedule C losses, which must be carried
forward.

The answer: Could go either way -- depends on the specific
facts and circumstances. How much improvement was added
before sale, for example.

__
Art Kamlet ArtKamlet [at] AOL.com Columbus OH K2PZH

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John Molinda wrote:

- quote -

As the short term capital gain rate is the SAME as the
ordinary income rate, there is no effective difference at
this time.

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- quote -

As you suspected, the real estate agents are technically
incorrect. Since short term capital gains are taxed the
same as ordinary income, this is usually a distinction
without any effect. Hoverer, in your case it does make a
difference since there are other losses to be considered.

--
Don EA in Upstate NY

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John Molinda wrote:

- quote -

This is wrong. There may very well be fact situations in
which gain on investment properties is ordinary income, but
you have no given any facts which indicate that your
situation falls in this category.

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John Molinda wrote:

- quote -

First of all, tax professionals are generally more accurate
when it comes to tax issues than real estate professionals,
who don't deal with taxes all the time.

That said, the issue you bring up comes down to whether your
actions make you look like a dealer in real estate, or an
investor. If you bought three properties and sold them
within three months, it could well appear that you were
purchasing inventory rather than investments. As inventory
their sales would generate ordinary income rather than
capital gain.

Stu

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I'm wondering if anyone can give me some help with this
matter...

I bought 3 investment properties in FY2004. Real estate is
not my normal income generating line of work. I speculated
that the real estate market would boom where I bought the
houses. I bought them in March '04 and sold them in June '04
for a net profit of $150,000.

Several accountants I spoke to told me that these
transactions would be considered short term cap gains, since
this was investment income and I could wash my NASDAQ losses
from 2000 ($150k) evenly with the $150k profit I made on the
sale of the real estate.

However, I spoke to several real estate agents and investors
who told me that the IRS always considers real property sold
within 1 year of its purchase as ordinary income, regardless
if it was invesment. In other words, there is no such thing
as short term cap gains for real property investment income.

Can anyone clarrify?

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