Posted by Dave Whisnant on June 28, 2001 at 09:43:27:
Thank you for your question. I am not affiliated in any way with Carleton Sheets. I am a full time real estate investor in the Atlanta area. On my web site, I do offer comments on Carleton Sheets’ course, and other real estate articles, but I do state that I am not affiliated with him or his corporation.
I am surprised that you were given the run around on your question, one that active investors are all to familiar with come tax time.
Basically, if you have some other business or profession that is your primary occupation (where you spend most of your working time), your real estate investing activities will be seen as investment activities. Investments will be subject to capital gains, so long as you hold the properties for the required time period.
If you start to do a significant number of deals, or if you primarily do real estate as your means of earning a living, the IRS may reclassify you as a “dealer.” If you are a dealer, you are not able to claim capital gains, and any income you make from flipping properties is seen as income, and is taxed at income tax rates.
Your friends that own more than one property are probably trying to claim that the property is a residence, and as such escape taxes when they sell it. Remember that if what they are claiming is not true, then that is fraud – not good. I wouldn’t suggest that anyone do anything like that, as eventually they will catch up to you.
If you are only doing a few per year, and you have a full time job, you probably are o.k. to take capital gains (provided you hold it for long enough). This will be an issue to hash out with your accountant, and you always need to realize that whatever you claim can be tossed out by the IRS if you are audited.
As you grow, you can develop corporate strategies to minimize taxes like having a corporation that handles your long term rentals, and another corporation for flips. When you sell a long term rental in the long term rental corporation, you should still be able to take capital gains as that business is in the long term rental business, not the property flipping business.
I hope this helps!
P.S. I have an article on tax deferred exchanges that is relevant to this discussion, and other real estate articles. My autoresponder can give you the info you need to access this. Any reader can e-mail me at
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