Do I need to pay capital gains on a property bought and sold in a company?
If I were to purchase a property within a corporation ( llc, c corp, or s corp), and then sell the property in less than a year (flip it), then put the gain toward fixing up another property in the corporation, showing no net profit, do I still need to pay capital gain tax on the sale? My understanding is that with a corporation, you pay taxes on your net gain after your expenses. Does this rule also apply to taxation on capital gains?
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June 7th, 2010 at 11:21 am
Yes, you would pay taxes on the gain from selling the one property, even if you put the gain into another property within the corporation. Worst part is that your gain would be short-term if you held it less than 1 year. Oh, there is no such type of company as an LLC, if you formed that type of company, you’d still have to decide if it’s a C corp, S-corp, partnership, or schedule C business. There is no IRS tax return for an LLC by itself. One thing you can do though to put off any taxes on the gain on the sale of the property, would be to turn around and buy a similar property, that would be called a 1035 exchange, and you would postpone the taxes on the gain that way.
June 7th, 2010 at 12:10 pm
Is the corporation in the business of flipping houses? If so, the houses are not capital assets, but inventory. When the corporation purchases the house, all expenses of preparing it for sale are deductible. So if the income from one house is used to fix up another house, the income and expense may cancel each other out.
By the way, this process has nothing to do with a corporation. You could do this activity as a sole proprietor and the income and expense would be figure the same way. The net income would be taxed as ordinary income subject to Social Security and Medicare. A net loss could be used to offset other income.
Other answers have dealt with the situation where your corporation is not in the business of flipping houses, and so the gain is capital gain. The cost of maintenance and repairs would not be deductible. Improvements such as major renovations (new kitchen, new roof) add to the basis of the house and reduce your capital gain. Short-term capital gain is taxed the same as wages, but no Social Security or Medicare tax is paid.