This article gives a pretty good explanation of the criteria and ramifications of being a real estate dealer: http://www.creonline.com/articles/art-246.html
I’ve been parking short term money in some fix & flips. These typically take 4 to 6 months to turn around and sell. If I do enough of these, and I might be there already, I will likely be called a dealer.
My question is, is there is a way around the self-employment taxes? Would I still have to pay these if I purchase and flip homes through my self-directed IRA?
You were a dealer to real estate when you did your first flip. It may take a pattern of activity for the IRS to recognize that you were a dealer to real estate for all those flips, but when they do identify the pattern all your flips will be recharacterized as dealer dispositions. Back taxes, interest, and penalties plus the self-employment income taxes plus its interest and penalties will be assessed in arrears. If you can’t pay the tax bill, the IRS could seize your personal assets.
Get it right from the beginning. Report all your flips as dealer dispositions.
Doing the deals in your SDIRA eliminates the tax impact of being a dealer to real estate.
Flips/rehabs are always ordinary business income - never capital gains. The houses are treated as inventory.
Rentals are always passive and capital.
The problem comes when you have some rentals and some flips.
Being a “dealer” only means that your rental business is incidental to your flip business. Being classified as a dealer means that your rental income will be considered an incidental part of your larger flip business income (Sch C) rather than passive (Sch E) income.
This is bad if you have positive income from rentals as it will now be subject to SE tax.
This is of no consequence or good if you have rental losses, as the loss will offset some of the business income, resulting in lower SE tax. If you have significant losses, it’s even better because it avoids the passive loss limits otherwise imposed.
However, you don’t want one flip messing up your normally passive rental income stream.
The key is to document what you intend to do with the property at the beginning. Did you advertise for tenants, interview them, run credit checks? If so, then you intended to rent the property. It goes on Sch E.
Did you advertise the house for sale? Contract with a RE agent? You intended to sell the property. It goes on Sch C and the house is considered "inventory.
Follow these rules and don’t worry about what the IRS does. Facts and circumstances will evidence that you properly accounted for both your rental and flip businesses.
PS,
having business income inside an IRA can have significant tax consequences, require filing a 1041 for the IRA, etc.