question regarding real estate investing and the capital gains tax

[dirtracer1]

hi guys. i'm a total moron regarding investments and tax issues. right up front i'll admit that i don't know diddly. that said, i'm diving in head first....hopfully just not in the shallow end of the pool.
i've bought a residential lot in a new subdivision (paid cash for the lot, so it's already paid for) in a growing area. it's got alot of building activity in there and the housing seems to be selling and there are people buying and living there already. i've got a builder (a trust worthy buddy of mine) and a real estate agent (again, another trust worthy buddy of mine), a stamped set of prints and i'm currenty in the process of obtaining an investment type construction loan from a local bank. the loan lady at the bank said that she's approving the loan, so all appears to be a go. as soon as i close on the loan, i'm clearing the lot and starting construction. i'm going to have it listed and start shopping the plans around on the mls as soon as i break ground. i'm hoping for a pre-sale prior to finishing the house. hopefully, the house will be complete and sold prior to the end of this calendar year.
i've already got a line on another lot in the same subdivision (for the same price as the first one)......so.....as soon as i get this first one sold and closed, i'm gonna do this again.
here's my question. what is this capital gains tax and how does it work.....or work against me?
what other, if any, tax liabilies am i looking at?
what's the tax % rate of capital gains anyway?
should i just go ahead and pay the tax and get it over with or can i defer paying this tax as i'm planning on re-investing the profits from my first sale? if so, just how does this work......how much can i defer and for how long?
all of my eggs are in this basket, so any and all help will be greatly appreaciated. thanks in advance for your help. :)

[CAPSIZED]

First of all, you are counting your chickens before they hatch. I'm not being skeptical but it is pure speculation that you will make such a substantail profit that you will need to worry about taxes. However when you do make a killing on that house expect to pay taxes because its counted as your regular income. If you owned the lot for more than a few years then you can break it up and claim long term capital gains on it and short on the house (maybe). How good a friend is your builder? If he is a really good friend and you want to keep it that way you might want to get another builder (learned this the hard way). The only way to avoid the tax is to not make a profit. There is such a thing called a tax free exchange however its a pain in the arse and involves a third party. Ask you CPA about it. Last but not least add 20% or more to what ever your builder tells you the total cost will be. Hope this helps.

[flatscat1]

I think you are talking about a 10-31 exchange. There are very specific-and I mean very- rules that must be followed to avoid paying the taxes. The way I understand it, if you sell an investment property and intend to use those proceeds to fund another investment property you can avoid paying capital gains taxes if:
1. You declare prior to the sale that this is an investment property
2. You NEVER take possession of the proceeds - they must be held in escrow by a financial institution or attorney or other qualified escrow service
3. You use these proceeds, at least in part, to fund the new investment within a time period (I forget how long - like 3 months I think). Also, the funds from the initial sale can be split between up to 3 "new" investment properties. So remember that steps must be taken prior to closing on the first property or you cannot enter into an exchange.

In short, you should contact an attorney specializing in this. If you are serious about it. There is an attorney in Houston named Charles Maynard who is the best at this - he wrote the book.

[Mr. Breeze]

Ray Martino ?sp.? on the radio talks alot about that subject. Also, search Del Walmsley. his web site is helpfull. He's on Biz radio, I think its AM 1320.