Posted by David Krulac on November 20, 2001 at 16:22:59:
after being sanitized by the IRS, I guess we’ll have to agree to disagree. good Luck to you.
David Krulac
Getting tagged as a “dealer”? - Posted by Enrique
Posted by Enrique on November 17, 2001 at 15:25:17:
I was just wondering how common it is for the IRS to deem fellow investors as ‘real estate dealers’? I would like to use land installment contracts but would like to avoid the hassles from the IRS. I was wondering how common this problem might be. Also, any advice on how to avoid this callsification would be very helpful. Thank you all for any input.
Enrique B. Romano
Re: Getting tagged as a “dealer”? - Posted by JHyre in Ohio
Posted by JHyre in Ohio on November 18, 2001 at 07:42:28:
Check out my piece under “How-To Articles” on dealer issue…you can post related questions on the Legal Forum for follow-up.
John Hyre
Re: Getting tagged as a “dealer”? - Posted by Dave T
Posted by Dave T on November 17, 2001 at 20:25:10:
It is a common misconception that the IRS “tags” a real estate investor as a dealer – they dont. Instead the IRS looks at the character of EACH real estate transaction and determines whether dealer realty tax treatment applies.
The answer to your question about how many deals it takes before dealer realty tax treatment applies is ONE.
One deal, unlikely… - Posted by David Krulac
Posted by David Krulac on November 19, 2001 at 12:59:45:
Dave T.
1 deal is possibly a dealer deal BUT I don’t think that likely.
You would have to own it for 1 year and 1 day before this would be a factor, as less than 1 year is ordinary income anyway at the SAME tax rate, (up to 39.6%) as your regular income. So less than a year is not a factor.
If you did only one deal in a year and you owned the subject more than a year, then it is possibly a dealer deal, but very unlikely. There could be other circumstances like you did 50 deals the year before and 50 deals the year after.
I know that certain gurus and others are running around saying 1 deal and you’re a dealer, but in reality it doesn’t work quite like that. I think newbies are being misled. The IRS has never defined a number that would make you a dealer, so 1 is a possible answer. But zero is also a number. So maybe if you do zero deals in a year, you’re a dealer.
And of course there is an IRS safe harbor which nobody ever mentions either.
Its just what I think.
David Krulac
Thanks 4 ur input! (nt) - Posted by Enrique Romano
Posted by Enrique Romano on November 17, 2001 at 22:31:31:
Thank you.
Re: One deal, unlikely… - Posted by JHyre in Ohio
Posted by JHyre in Ohio on November 20, 2001 at 06:47:26:
Hi David,
I think we agree that the number of deals helps determine whether or not “dealer” status exists, but it of course depends on context. A single sale could be a dealer transaction if it’s a clear flip, while 100 sales in a different context are not…this is a very “mushy” area of the law. Out of curiosity, to which IRS safe harbor are you referring?
John Hyre
Re: One deal, unlikely… - Posted by Dave T
Posted by Dave T on November 19, 2001 at 20:34:56:
The Internal Revenue Code, Section 453, defines a dealer disposition as “any disposition of real property which is held by the taxpayer for sale to customers in the ordinary course of the taxpayer’s trade or business.”
Let me emphasize that the operative word is ANY. I have consistently maintained that the seller’s intent is the predominant factor in deciding whether a real estate transaction is a dealer disposition – even if the seller only did ONE deal.
I would be inclined to agree with your post if you said that the RISK of having a dealer disposition discovered by the IRS is probably pretty low if only one deal is reported. I would even agree with you that that is the reality of an overburdened bureaucracy.
A low risk of discovery by the IRS, however, does not make the taxpayer correct in applying installment sale tax treatment for that transaction (the original post referenced land contract sales).
An excellent essay on this topic is: Are You a “Dealer” Or an “Investor”? by John Hyre. It can be found in the “How to Articles”.
Re: One deal, unlikely… - Posted by David Krulac
Posted by David Krulac on November 20, 2001 at 16:19:05:
the five years, I’m not a dealer safe harbor, of course.