Do you have to pay capital gain from pre-foreclosures?

If you start a real estate business buying and selling pre-foreclosures, will you have to pay capital gains tax even though the houses are your inventory? Or will you just pay income tax?

Hi,

To my understanding, the capital gain tax is deferred on pre-foreclosures. So no.
However, I'm not a real estate agent or accountant, I've only taken one class on the subject You may want to double-check!

I don't know if there are special capital gains rules for pre-foreclosures but, in general, capital gains taxes are levied on any type of investment or business property that is sold for a profit. So long as you own the property, capital gains taxes should not apply as you have to sell the property at a profit in order to have a gain (you will, however, have to pay local property taxes on any property you own as well as income taxes on any net income you earn from renting the property).

There are a couple of exceptions that I know of in real estate. One has to do with the sale of one's own home. There is no tax if you sell your home and purchase another one within a certain period of time. There is also a one-time exclusion that lets a person (and you may have to be a senior citizen for this) sell their home and not pay the tax. But this can only be done once in a life time. The other one applies to investment property and that allows you to sell a piece of real estate and reinvest the entire proceeds in another investment property and not pay any capital gains tax until you cash out by selling your property or properties and don't reinvest them in more real estate.

My advice is, if you are doing this as a business or as part of an investment program, get a good accountant who understands real estate. The services of an accountant (and you might also want to make contact with a good lawyer also) will cost you but, if this is a serious business or investment, the advice should not only help you to make more money (hopefully, a lot more than the cost of the advice) and the fees you pay would be a business expense which could be deducted from any income you make thereby reducing your income tax liability. Good luck.

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