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A recent United States Tax Court decision underscores the importance of expressing intent in order to defend a capital gain qualification, even if property is never developed or improved. In the case, although the taxpayer intended to develop the property and incurred soft costs to arrange for further development, they held it for over 10 years without making improvements.
It was ruled that the absence of such intent forced the real estate investor to recognize ordinary business income instead of capital gain. Taxpayers should be aware of the importance of characterizing activities in partnership or operating agreements, coding on tax returns, and other third-party proclamations in order to qualify for capital gains.
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