Avoiding being labeled a "Dealer"

I have read a few times that if you rehab a few houses and resale them then you will be labeled a “Dealer” for tax purposes. There seems to be some kind of trigger point for the label. Should I be worried about it? If so, should I create a company just for rehabbing and use my other company for keeping properties as rentals?
I’m new to this but would really appreciate comments.
Leslie Gillett

Yes the purpose of the separate entity is to separate the dealer properties from the keeper investment properties so they are not contaminated and defined as dealer property. Where this comes in much of the time is when you fix up and sell quickly with owner financing(installment sale). All that phantom income ( profit) is classified as income in the current year. Even though you don’t get it for years.

There is no trigger point since the IRS is the one that defines it. And that would happen several years after your return.

What should not trigger it is if you do not make the majority of your income from quickly reselling. Since you are in Texas you should consider the family limited partnership for the longer term investment properties.

See http://www.reiclub.com/articles/you-dealing for more on that topic.

John Hyre

Thanks for the replies folks. I really want to keep some properties as rentals but I would like to do some rehab and sale deals occasionally as well. I may create a second company just for the rehab business.

The issue Bud Branstetter described in having your dealer transactions taint your investment property sales, is not your real problem – as I see it.

“Tainting” is avoided by conducting your dealer activities in an entity that is separate and independent from your rental property activity. If you already have a business entity established for your rental operations and your dealer activities are done in your own name as a sole proprietor, then you already have separate and independent operations.

The IRS “tainting” problem is already addressed.

The real problem looming on your horizon is not a tax issue, but a liability exposure issue. You want a business entity for your dealer activity to contain your liability exposure, not to address a non-existent tax problem.

Just my opinion.