How can I avoid dealer status doing this?

General Real Estate Investing
1

I am getting involved in buying homes and doing short term lease options with tenant-buyers. The terms are only 6-9 months. Will buying homes, renting them for 6-9 months then selling them cause me to be flagged as a “dealer” by the IRS? How can avoid this?

2

I don’t think the IRS really cares if you’re a dealer – they just want the taxes that are owed…but you’ll get hammered with short-term Capital Gains!

Keith

3

The whole point of being an investor as opposed to a dealer is to not have to pay Self-Employment tax on the profit from the sale of the properties. So I do care if the IRS labels me as one. :shocked

4

I understand the issue…if you buy with the express intent of flipping (whether or not you hold for 6-9 months), you’ll be tabbed with short-term capital gains (at your nominal income tax rate + SE Tax + state tax…if you buy with the intent of rent-and-hold and you hold in excess of a year, you’ll pay Capital Gains at a 15% rate (plus state taxes).

My point is hold longer and stop advertising that you really intend to flip them…

Keith

5

I’m no tax guru, but from what I understand, the length of time you hold the property is only ONE guideline the IRS uses to issue “dealer” status. Other criteria the IRS may also consider: if RE investing is your major source of income, or you spend more than 500 hours per year on the business. Check with an accountant or tax attorney.