Real Estate Tax Planning

Defining “Real Estate Investor” and “Real Estate Dealer”

I have great news! You can have in your real estate portfolio both investor and dealer properties. This distinction is significant for tax purposes.

 

Here’s a snapshot of the potential tax differences:

 

Suppose you profit $90,000 from a property sale:

 

  • As a dealer, your tax could be up to $46,017 if you’re in the 37% tax bracket and also  subject to self employment taxes.

  • As an investor, it might be only $21,420 as the maximum tax on long term capital gain is 20% apart from 3.8% net investment income tax.

 

That’s a potential tax savings of $24,597 in taxes for investors!

 

You look at every property individually to determine its classification and make sure you identify each property in your records as either an investment or dealer property. Not doing so can lead to complications with the IRS, and believe me, you don’t want to rely on the IRS for “mercy.”

 

How the courts determine your classification:

 

  • The primary factor is your intention when purchasing and holding a property. Your records play a pivotal role in illustrating this intent.

  • Properties meant for sale to customers are dealer properties. If you frequently buy and sell properties within a year, they’re likely considered dealer properties.

  • Properties purchased to renovate and sell usually fall under dealer properties.

  • Subdividing properties also leans them toward dealer classification unless they meet the specific criteria of IRC Section 1237.

 

On the other hand, if your goal with a property is appreciation or rental income, it’s considered an investment property.

 

Remember, each property’s classification is determined independently. If you have both types of properties, make a clear distinction in your books and records, as to which properties and dealer properties and which are investment properties. 

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