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Feds battle real estate investors over capital gains

Should land sale profit be taxed at higher rate?

Timothy Phelan, along with two other investors, purchased a 1,050-acre parcel of vacant land for investment. They formed the Jackson Creek Land Co. (JCLC) partnership to hold title for long-term appreciation in market value. During the next few years, the local improvement district brought water and sewer pipes to the property. Purchase Bob Bruss reports online. Four years after purchase, JCLC sold 102 acres to a home builder. The profit was $607,344. Later, the same year another portion of the land was sold to another home builder at a profit. Phelan reported his profit shares as long-term capital gains on his income tax returns. But the IRS argued these profitable land sales should be taxed at the higher ordinary income tax rate because JCLC was really in the land development business. However, Phelan replied the land was held for long-term investment and the development activity was minimal. The taxpayer noted bringing the water and sewer service to the property was contracted...