Last year I inherited several thousand dollars from my mom's estate. I paid off my mortgage and purchased a lot in my neighborhood. We are debt free as of this year. My husband is a builder and we would like to build a spec home to sell for a profit. We have $250K left from the inheritance which is in a money market account. We would invest 100-125K into building a nice little spec home and sell it for quite a bit more than our initial investment (that will be around 200K total). We are hoping to build a home worth 280-300K (the current market average) so our profit after selling fees would be around 250-275K or more. I'm wondering if we would pay taxes on all of that profit or just the portion over and above the 200K of inheritance $'s invested?
Additionally, we are planning to invest the remaining portion of 125K into retirement accounts and an emergency fund. Any thoughts or advice would be appreciated. Thank you!
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7I think you have some vocabulary confusion here. Profit = difference between (revenue received) and (costs). So if it costs you $200k and you sell it for $300k and have $25k in sales costs, then your profit is (300k-200k-25k) or 75k. Your numbers also don't really add up - you might want to make them more consistent across the way. "Several thousand dollars" up in the first sentence, for example, is incongruous with "$250k left" which is much more than 'several' suggests.– JoeFeb 11, 2015 at 21:52
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2I think she's ignoring the cost to purchase the lot (which is implied to be around $75k-100k.– mkennedyFeb 11, 2015 at 22:03
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Upvoted because it's a good question. I don't get downvoting questions... You will pay taxes on the gains you make from the sale of the spec home. As stated above, gain = revenue-cost. (assuming you've already paid the inheritance taxes if any). Is this a good idea? No way to know. Is your husband an awesome builder? Is there demand for housing where you live? Will interest rates stay down? It's a "spec" home, not a sure thing.– ssaltmanFeb 13, 2015 at 13:50
2 Answers
When you sell the spec home, you will owe taxes on the sales price minus the cost of the home, including the land, materials, paid labor, and other expenses. The fact that you pay for this with with the inheritance in the money market account won't affect the taxes you owe when you sell the spec house.
You should very much nail down your planned expenses and profit. However beyond that you may have some better options to avoid taxation assuming all your plans go well.
You should take into account the ability to avoid taxes on the sale of a primary residence. You could build the spec house, then move into the spec house. You could then sell the primary (avoiding any profit less than $500k filing jointly, assuming you meet the Home Sale Tax Exclusion requirements). You can then in another two years or so sell the spec house if you want and again avoid up to $500k in profit.
http://www.nolo.com/legal-encyclopedia/the-250000500000-home-sale-tax-exclusion.html
