Today TaxMama hears from David in the TaxQuips Forum, who defines a dealer in real estate as someone who sells a single property for profit, as long as the intent to act as a dealer to real estate is present.”
Dear David,
You tell us that IRC 453(l)(1)(B) defines a dealer disposition as:
Any disposition of real property which is held by the taxpayer for sale to customers in the ordinary course of the taxpayer’s trade or business
Are you right that one property would qualify?
Perhaps. Perhaps not. Here’s an interesting quote from an article by Cali Zimmerman for NuWire Investor:
Real estate dealer rules can get a bit murky. In fact, “[t]he problem is so severe that, according to the Fifth Circuit Court of Appeals, ‘if a client asks you in any but an extreme case whether, in your opinion, his sale will result in capital gain, your answer should probably be, ‘I don’t know and no one else in town can tell you’’ (J.D. Byram, CA-5, 83-1 USTC para. 9381, 705 F. 2d 1418),” according to The CPA Journal.
The distinction between investor, landlord and dealer is important.
- As an investor, all the expenses are capitalized. The gains are capital gains.
- As a landlord, fixing up a property to rent out, the rental income is passive. The gains are capital gains, except for the depreciation.
- As a dealer, not only do you not get capital gains treatment, but the income and profit are self-employment income, subject to 15.3% self-employment taxes.
According to George Saenz in a BankRate.com article, issues to consider before condemning a transaction to dealerhood include
- Length of time the property is held.
- Number of sales
- Major improvements, like re-zoning and subdividing.
- The owner’s involvement in the sale of the property – are they handling it all themselves (or via their own paid staff), or are real estate agents and brokers involved?
Another issue to consider, that you have not, is the phrase “taxpayer’s trade or business”. Is flipping real estate their main occupation? Is this what they are living on? Probably not.
Generally, you can probably support investor or landlord status if this is not your main livelihood. Do the research properly and you will undoubtedly find case law to support your position if you’re only flipping one or two properties a year, while holding down a ‘day’ job.
And remember, you can find answers to all kinds of questions about real estate dealers, and other tax issues, free. Where? Where else? At www.TaxMama.com.
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