If you buy a property to flip( fix it up, and then sell it,) is that property a dealer or an investor property?
The Difference
If you are a real estate dealer, you face ordinary income and self-employment taxes.
If you are a real estate investor, you can qualify for tax-favored, long-term capital gains on sales when you hold the properties for more than one year.
The Situation
In spite of all the litigation over real estate dealer and investor status, there’s no bright-line test that will give you a definitive answer to this question.
Section 1221(a)(1) defines dealer property as “property held by the taxpayer primarily for the sale to customers in the ordinary course of his trade or business.” Commonly called a “Property Flip”, although you could be heading that way with one or two properties, you are not currently a builder or developer clearly in the business of selling inventory to customers.
On the other hand, you are not simply an investor who purchased the property to hold it for appreciation or to use it as a rental and collect rents. There is no question that your purpose in buying the properties was to actively fix(Property Flip) them up and sell them at a profit. One key thing that can help you get tax-favored investor status (capital gains on your profits) is that you did this only once or twice.
Your Situation Boils Down To This:
You look like an investor if you only have one or two sales.
You look like a dealer if you bought the properties knowing that you had to improve them to make a profit.
If you spent lots of time fixing up the properties, you look more like a dealer.
Of course, if you spent not too much time on the real estate and lots of time on your main W2 generating business, you look more like an investor.
You can be in limbo with your facts and circumstances.
Your best tax approach is to assert that you are an investor.
For more on the dealer-versus-investor issue, see Real Estate “Dealer or Investor,” Why Does it Matter?
Takeaways
- Periodically buying property, fixing it up, and selling it(Property Flips) makes it look like dealer property. But when you seldom do this, the property can look like investor property.
- If you hold the property for more than a year from the time of purchase to the close of escrow, investor status gives you tax-favored, long-term capital gains treatment.
- When you buy and sell without fixing up the property, or when you buy and rent and then sell, you have strong investor attributes.
- The fix-up, remodel, development, etc., give you dealer attributes.
- The whole issue of dealer versus investor status is a facts-and-circumstances classification, and it’s a tough call.
If you are planning on buying investment property and have tax questions, please don’t hesitate to call me on my direct line at 509-543-7600 or send a request HERE.
October 2021
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