Real Estate Dealer vs. Investor [Tax Smart Daily 025]

If you are flipping properties and you get tagged as a real estate dealer, your flips are going to be considered inventory. They're not going to be eligible for 1031 exchanges and they're going to be subject to self-employment taxes + your marginal rate (no capital gain rates for flippers).
Here are things the IRS and Tax Courts will look for when determining whether or not you are a dealer.
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[@CDT5280]

Thanks!

[@movie30000]

I am tax preparer myself, and i admire your level if integrity and transparency

[@shalinikodial1015]

What about land flippers where the taxpayer buys underdeveloped land; does some improvements and then sells it to the customers . Can he consider installment sale method inder 537 publication ?

[@nrehberg]

if I flipped a property that was owned in my single member LLC for over one year and I treat the sale as a capital gain on my personal taxes?

[@TheRealEstateCPA]

Not enough details to know for sure because it is based on your particular facts and circumstances. However, if the property was held for over a year and you had the intent to hold it for investment, then it generally receives capital gains treatment.

[@adammichael3359]

There was a new rule carved out for COGS under the Tax Cut & Jobs Act in which businesses under the Cash accounting method making less than 25mil may write off inventory as section 179 deductions (if I'm not mistaken). Does that not apply to flips?

[@TheRealEstateCPA]

From a technical tax standpoint, real estate is not "inventory" and must apply capitalization rules for direct and indirect costs. I used the term inventory in the video to simplify the concept for investors, however your question now has me second guessing how I explained it :) To answer your question, flippers must still capitalize direct and indirect costs. These rules are found in IRC Sec. 263A and Reg 1.263A-1(e).

[@BenD3HB]

What about "flipping" a house via creative finance? Buying on terms and selling on terms in a short period of time (under a year)? My understanding is that the Installment Sale Plan (IRS Pub. 537) wouldn't apply to you if you are considered a Dealer. How would you structure that to not be tagged as a Dealer?

[@TheRealEstateCPA]

Correct, if you are a dealer you cannot use the installment method. There are many factors weighed by the IRS and Court when deciding whether or not you are a dealer. If you are making a business out of flipping homes via creative financing, you are likely a dealer and your gains are recognized in the year you liquidate the property... not when you collect on the note.