Capital Gains

[greg_cav]

What is the name of your state? Massachusetts

Perhaps this is better suited for an accountant, but I have a question about capital gains.

I'm considering leasing a piece of property from the owner for a couple of years and improving it for a primary residence. The land is worth about $250K. Doing a comparative market analysis, I project that the value of the residence when I'm through would be about $650K. I plan to pay cash for the construction of the residence. At the end of the lease I will secure a conventional mortgage for the balance of the land value. Here's the breakdown:

$250,000 land price
$650,000 total improved value
$36,000 lease payments
$436,000 net equity
$214,000 mortgage
My question is, when I convert the lease into a mortgage, would I be subject to a large capital gains hit? I know primary residences are somewhat immune to capital gains but I just wanted to verify that because this is not a conventional situation, I'm not opening myself up to a huge tax bill (other than the property taxes, which will be hellish but I'm ready for that)

Thank you,

Greg

I don't think so. You are essentially buying the land from the original owner, and you own the "house structure" on this land, by virtue of having paid for its construction. (Notwithstanding the fact that the land holder owns all non-movable structures on his land, unless you have a prior arrangement with him). You should be subject to capital gains only when you sell the land + house. However, it may be a tricky issue for the current landholder, because he will have a finished home on his land that may be construed as an improvement. The contract that you and the landowner signed is probably the key. If it specified a deferred purchase (which it sounds like it did), I would say that you are safe.

[abezon]

Why are you leasing at all? Why not just buy the land & get a construction mortgage? This avoids most of the potential problems with you building a house on someone else's land.