Hey guys. Does anyone know how many properties you’d have to flip in one yr. before the IRS labels you a dealer? Then they they tax you as one. Thanx for any help.
AFAIK, there is no IRS regulation as to any specific number of transactions that “qualify” you as a dealer. It is your intentions and actions that qualify you as a dealer. Make sure you have a paper trail that clearly states your intent to invest in the property, not flip the property. Write it into the offer that you intend to hold the property as a long term rental. Keep receipt for newspaper ads for attempting to rent the property, or copies of listings for free craigslist rental ads, or any other paperwork you can think of that shows you always intended to INVEST in the property rather than flip the property.
If circumstances change beyond your control, like you need the money from the property to invest in another, better long term rental, and you sell the property for good business reasons, then you have real ammunition to refute the IRS claim you are a dealer.
Documentation is the key to defending your intentions if circumstances dictate that you sell the property rather than rent it.
jmd_forest
phlemboy - another point to consider is that the dealer treatment is defined for each property, not for all your properties. For example, if you buy and hold some properties and flip others, you can be a dealer for the ones you flip and not a dealer for the others.
I agree with jmd_forest’s comment. However please understand that it is not as simple as placing adds for rent. I believe you can justify few properties that you could not rent and eventually you had to sell. But if you do it for all the properties you buy, I believe you will have a really hard time selling the idea that you wanted to hold the properties but couldn’t find tenants. In the other hand if you hold the majority of your properties, than when you sell one because you couldn’t find a tenant it will probably be easier to support that you were not a dealer in that transaction.
The answer is that the IRS never labels YOU as a dealer. You can flip hundreds of properties this year and never be labelled a “dealer”.
Instead, the IRS looks at EACH transaction to determine whether a “dealer disposition” has occurred. The IRS will classify the transaction as a dealer disposition and then tell you that you ACTED as a dealer to real estate for that transaction.
This does not mean that you are labelled a dealer and all your future sales henceforth will be dealer dispositions. It just means that you acted as a dealer for that transaction, and that transaction will be taxed as a dealer disposition.
If you are looking for a magic number, the answer is ONE. If you are flipping property, you are acting as a dealer to real estate for that transaction when you complete your very first flip.
This magic number is implied by § 453 of the tax code which 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.
The word ANY in this definition says to me that the magic number is ONE.
I agree with jmd_forest. If your intent behind the property purchase was to hold for rental use, and business circumstances changed your plans, then selling the property after a short holding period will not automatically cllassify the sale as a dealer disposition.
If your intent was to purchase to flip, then the sale will be a dealer disposition.
Thanx. That helps a lot. My plan is rehab & rent, but sometimes you just need to raise cash. Perhaps I could avoid the issue by doing a cash out refinancing to raise the cash. Thanx again.