My CPA wants to tag me as a “real estate dealer.” I don’t know that much about it, other than I’ve heard it’s bad. Anyone out there have any experience with this?
It’s kind of like pot. If ou get caught with a few joints you are a user. If you have a few pounds you are a dealer. If you are buying and selling 4 or 5 or 6 properties a year you may be a dealer. I believe even the rules are unclear and there may be some grey area. I would hire a CPA that does not mind walking a thin line. It is not right or wrong but just how you inteript the rules. I wish I knew more on the subject. After I sell my rehabs I may be labled a dealer as well
The IRS does not really “tag” anyone as a dealer. Instead, each real estate sale is evaluated to determine if the transaction is a “dealer disposition”.
The tax code defines a dealer disposition as “any disposition of real property held primarily for resale.” If your intent in acquiring the property is to resell for profit, rather than hold for production of income or long term appreciation, then the sale of this property fits the definition of a dealer disposition.
There is no stigma attached to being a dealer to real estate. Your profit is taxed as ordinary self-employment income. You can not use a 1031 exchange to defer taxes, nor can you take installment sale tax treatment if you sell on contract for deed or with seller carry-back financing.
If you are successful at property flipping, you will pay higher taxes on your dealer dispositions than you might have paid if you held the property for the production of income. But paying higher taxes, just means you are making a lot more money.
Howdy Dave T:
Beautifully put Dave T. Does the T stand for Taxman.