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Subdivide land and conquer tax rates

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in Small Business Tax

If you bought raw land years ago as an investment, you may hope to cash in now on a building boom in the area.

Strategy: Subdivide the land and sell it in separate parcels. If you stay within the tax law boundaries, your entire profit is treated as tax-favored capital gain.

Under current law, the maximum tax rate on long-term capital gain is 15% (20% if you’re in the top ordinary income tax bracket).

On the other hand, if you’re classified as a real estate “dealer” instead of an investor, your profit is taxed as ordinary income. And even if you avoid the dealer tag, part of your gain could be taxed as ordinary income if you’re not careful.

Here’s the whole story: If you own a tract of land for investment and subdivide it into individual parcels for sale, you qualify for capital gain treatment (i.e., you’re not a dealer) if you meet the following requirements set forth in Section 1237 of the Internal Revenue Code:

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