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Taxation on house constructed and sold by Sylvia, a dentist

Sylvia, a dentist with excellent skills as a carpenter, started the construction of a house that she planned to give to her son as a surprise when he returned from Saudia Arabia, where he is serving in the military. She began construction on March 23, 2005, and finished the house on July 10, 2006, at a total cost of $70,000. Her son is expected to be home on September 1, 2006. On July 30, 2006, Roscoe offered Sylvia $245,000 for the house and Sylvia considered the offer to be so attractive that she accepted it. She decided that she could purchase a suitable home for her son for about $200,000. What tax issues should Sylvia consider?

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House cost $70,000 (which we assume includes the cost of the land)
Completion date of construction: July 10, 2006
Date of sale: July 30, 2006
Gain on sale: $245,000 - 70,000 = $175,000

First, is Sylvia in the business of constructing and selling houses? No, not at this point. If she did one house a year for several years, then the point could easily argued that she had a construction business. If that was true, the house would be inventory and the profit reported as ordinary trade or business income subject to self employment tax.

Sylvia has very good arguments against the trade or business ...

Solution Summary

The 456 word solution carefully explains the tax issues of the house sale with defenses for positions taken.