In today’s society real estate is a
hot market to be in. The main issue for
real estate professionals is whether an individual is an investor or a dealer
in real estate. A “dealer” is a person
who holds real property for sale, rather than for investment. If an individual is a dealer, then they hold
property “for sale”, thus, the gains and losses on the property are taxed at
ordinary income tax rates.
Here is a list of factors the IRS
considers when determining if the real estate gets dealer or investment status:
1)
Reason
property was acquired and time period held
2)
Effort of
taxpayer to sell property
3)
Substantiation
and extent of sales
4)
Efforts to
develop, subdivide, and advertise to increase sales
5)
Amount of
control exercised by taxpayer over a representative selling the property
6)
Time and
effort dedicated to the sale
The greatest disadvantages of dealer status are: gains are subject to ordinary tax rates,
unable to use the installment sale method and Sec. 1031 tax-free like-kind
exchanges. On the other hand, a dealer
can offset losses against ordinary income with fewer restrictions than capital
losses.
Some strategies that taxpayers can use to
show they are investors vs. dealers are:
1)
Use words
such as “investments” in organizational documents
2)
Use a
business code for real estate investment on tax return, rather than development
3)
Display the
property on financial statements as investments
4) Hold the property as long as possible, and reduce the frequency of sales, as much as possible
In conclusion, a taxpayer with the right tax planning and strategies can retain more funds for future real estate ventures.
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