Maximizing Capital Gains in Real Estate Transactions

Abstract

Property owners generally prefer the tax treatment of long-term capital gain over the tax treatment of short-term capital gain and ordinary income. At the most basic level obtaining favorable capital gain treatment is a function of ensuring that property is a capital asset and that the property owner has held it for more than one year. A more careful examination of numerous rules reveals that obtaining the most favorable capital gain treatment can be a function of other concepts and provisions of tax law. For instance, long-term capital gain can be subject to various rates, depending upon the type of property sold and the tax treatment of that property prior to sale. The character and temporal aspects of a taxpayer's losses can also affect the rates that apply to any gain a taxpayer may recognize in a taxable year. The order of transfers to and from tax partnerships may also determine the character and tax treatment of gains and losses recognized on dispositions of property and can affect how and whether the recapture rules will apply to the dispositions. Property owners who plan to develop and sell their property may also consider various strategies that will help them preserve and pre-development accrued value as capital gain. This article discusses these and numerous other issues and provides examples of how the rules apply and how property owners can plan to maximize their capital gains in real estate transactions.

Keywords: capital gain, capital loss, ordinary income, section 1250 recapture, section 1231 recapture, Bramblett, section 724, section 735, section 707, section 1239, section 453(g)