Again, let's use the developer as an example. Assume that the developer decides to sell one of his lots by taking back a note against the property. Even if he holds this note for more than one year and then sells it to somebody else for a profit, the developer will not have a long-term capital gain on the sale of the note. Because this was a note receivable acquired in the ordinary course of the developer's trade or business. This is the one that trips many people up.
Many people believe that rental property is a type of investment.
It is certainly possible to receive long-term capital gain rates on the economic gain on the sale of the property, but any depreciation that you recover will not be treated as capital gain income. This can get a bit tricky. But just understand that if you write the Great American Novel and hold on to the manuscript for more than a year, and then sell it for zillions of dollars, you will not receive long-term capital gain treatment on those zillions. Because you created the novel, the novel is not a capital asset in your hands. U.S. government publications that you got from the government for free or for less than the normal sales price.