How the Real Estate Dealer Status Affects You
By Pierre Mouchette | Real Property Experts LLC
The status of a real estate dealer is an IRS Classification that determines how the income an investor receives from their real estate holdings will be taxed. The IRS generally defines a real estate dealer in IRS Publication 334 - Tax Guide for Small Business.
Real Estate Dealer - you are a real estate dealer if you are engaged in selling real estate to customers to make a profit from those sales. This definition leaves room for interpretation and creates a lot of gray areas because investors utilize different strategies which can have different tax treatment.
The dealer status is subjective and depends on several factors, but ultimately it may depend on a tax court's view of the investor's situation. So, while there is no definitive test for determining whether an investor is a dealer, you should understand that the IRS will weigh the following factors:
The following are scenarios that will determine the status and the ramifications of the procedure.
The solution would be to operate your different real estate activities through separate entities, such as corporations or LLCs. One entity for active investing (wholesale flips and rehab flips), and another entity for passive investing (rentals, owner financing, and lease options). This separation of activities subjects only your active investing corporation to ordinary income tax treatment. In contrast, your passive investing corporation still enjoys the benefits of depreciation, long-term capital gains treatment, and installment sales treatment.
For current tax or legal advice, please consult with an accountant or an attorney since the information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.