 Distinguishing
'dealer' from 'real estate investor'
|
 Dear
Tax Talk,
I am in the process of selling an investment property that I will
obviously have to pay capital gains on unless I can Section-1031-exchange
it. I have invested and sold properties in the past and want to
continue to do so.
My question is: If I continue to do so, will the IRS assume that
I am a builder and tax me at the regular ordinary income rate or
can I just continue to invest on the side and pay a capital gains
tax rate?
-- Thomas
 Dear
Thomas,
Whether you owe ordinary income or capital gains tax on the sale
of real estate depends on whether the Internal Revenue Service considers
you a dealer or an investor. If you build a single home on speculation
and sell it shortly thereafter, and that is all you do in a year,
the IRS probably will consider you an investor and you will qualify
for capital gains treatment (although if you don't hold the property
for more than a year after construction is complete you'll pay some
tax at the short-term capital gains rates, which are the same rates
as tax on ordinary income).
If you buy a parcel of land, subdivide and sell 10
units in the year, the IRS may consider you a dealer. If you're
somewhere in between, you're in the gray area.
The gray area is where you have to decide what is
right and wait for the IRS to disagree with hindsight. Since both
you and the IRS want to hang on to more of your money, the courts
have come up with the following factors in determining whether a
taxpayer is an investor, versus a dealer:
1. the nature of the taxpayer's business.
2. the taxpayer's purpose in acquiring and holding the property.
3. subdivision, platting and other improvements tending to make
the property more marketable.
4. the frequency, number and continuity of sales.
5. the extent to which the taxpayer engaged in the sales activity.
6. the length of time the property was held.
7. the substantiality of income derived from the sales and what
percentage such income was of the taxpayer's total income.
8. the extent of advertising and other promotional activities.
9. whether the property was listed directly or through brokers.
If you're considered a dealer, you cannot use Section
1031's like-kind exchange rules to avoid current taxation.
To ask a question on Tax Talk, go to the "Ask
the Experts" page, and select "taxes" as the
topic.
|
