Re: Am I a dealer? (long) - Posted by Glen SoCal
Posted by Glen SoCal on April 11, 2004 at 06:39:03:
Carl-
I’m not a tax professional.
This subject has been covered at CREonline quite a bit. Try a search in the archives here and on the main board.
Having said that, this is my opinion about dealer status: If you acquire a property with the ‘intention’ of selling it as soon as possible, then it’s a ‘deal’; not an investment. If you attempted to sell the property in the short term, but for some reason couldn’t sell the property and it remained on the market for over a year, it could STILL be characterized as a ‘deal’ instead of a long term ‘investment’, as your intention was to sell the property immediately. If you flip enough properties to establish a ‘considerable’ volume and pattern of flipping, then you are a dealer.
The IRS can characterize ANY purchase and sale as a deal if there is enough evidence to support your intention to turn the property quickly, i.e., a deal. If you bought a property and began rehabbing, and listed the property on the MLS as soon as you began the rehab, you can see how the IRS would figure you intended to do a deal, and never intended to hold the property as a long term investment.
If you’ve held every property you’ve purchased as a long term investment, and purchased another property to hold (and taking title), but sold it immediately, it is unlikely the IRS would characterize the purchase and short term sale as a deal, or you as a dealer, as your history wouldn’t suggest that.
If you mix the purchases of your deals and long-term holds in the same entity, and if at some point the IRS characterizes you as a ‘dealer’, then all of your long term holds ‘could’ also be characterized as deals! If your investments are characterized as deals, you would no longer be able to enjoy the tax benefits of depreciation, or use long term investment vehicles such as 1031 exchanges for any of the properties. Also, you could be taxed at ordinary-income rates upon the sale of your properties even though you’d held them long term. This is a stretch of course, but I understand that it’s possible. And of course, you’d want to avoid having to have that conversation with the IRS.
A good strategy is to hold your long term investments in an entity seperate from your deals. In this way you telegraph what your intentions are to the IRS for the properties you intend to hold, and for the ones you intend to flip. As I mentioned earlier, selling one of your long term holds in less than a year can pass the ‘smell test’ if it was held in your ‘long term’ entity.
As to your question about buying on a L/O, then rehabbing and subsequently selling your option ASAP; it smells like a ‘deal’ to me. Doesn’t it you? But does that make you a dealer?
There is no number of deals you can do in a year that automatically earmarks you as a dealer. However, you can imagine that doing one deal is not going to mark you as a dealer. And that you could do a few deals a year and fly under the IRS radar for a long time; …or not.
It’s up to you and your tax professional to decide the risks and rewards for you investment strategy.
To answer your question: I don’t know if I can, but it hasn’t stopped me from trying. If you establish an entity to buy and sell flips, and one for holds, it doesn’t matter if the IRS marks you as a dealer, as your holds will be protected as OBVIOUS investments. Setting up an LLC to purchase the two properties you intend to flip won’t alter them. They are deals. And not taking title to the properties will make it harder to characterize the flips as investments. If you are trying to separate your ‘self’ from the LLC being tagged as a dealer; I don’t have an answer for that.
Doing a deal doesn’t make you a ‘dealer’, but the deal will still be taxed as ordinary income, unless you can characterize the short term flip as an ‘intended’ long term hold/investment. I think I’m correct about that tax treatment, but I’m not positive. If you purchase these flips outside of your ‘holdings’ entity, it seems to me that it doesn’t matter much if the IRS characterizes you as a dealer, as long as they understand the difference between your ‘deal’ and your ‘investment’ portfolio so that your investment polio is never in jeopardy of losing it’s favorable tax status.
I hope I haven’t bit off more than I can chew here. These are merely my opinions as I haven’t come in to contact with the IRS on this subject, nor have I interacted with an attorney on this issue other than here on this board. You should seek professional advice as opinions here can be worth as much as you pay for them.
Glen