If someone is selling land for a profit then it is a capital gain and the taxes can be deferred over the period of time the sale is being financed by the seller. The capital gain rate is also lower if the property was held for a year or longer.
Sounds good, doesn’t it? But wait, if the tax department considers the seller to be a dealer then all the tax must be paid in the year the property is sold even if the seller is collecting the proceeds over a long period of time. The tax rate is also the tax payers high marginal rate, not the capital gain rate.
Consider the implications. You could sell a property and be paid over ten years, but all the taxes are due in the first year. For the first few years you could be paying money to sell the property.
What constitutes being a dealer? This depends on the intent of the seller. The intent is determined by the number of lots being sold, the reason for selling them, the use of the lots being sold, the length they were help and the nature of the improvements and development. Two people could own identical lots side by side, sell them for the same price, but be tax very differently on the profits. A real estate tax professional will help in determining your status.
There are some schemes for a dealer deferring the taxes such as considering it an uncompleted sale until all payments are made or selling the notes to another company of yours for a discount. I don’t recommend these schemes and they could get you into tax trouble.
On the bright side, the determination of whether or not you are a dealer is done per property. This means you could have some properties which could be sold for capital gain and some which are sold as a dealer.
I am not a tax advisor and have just provided this information to make people aware of the need to consider the tax implications for raw land buying and selling. I recommend reviewing your situation with a tax advisor.
by Andreas Paramonoff