Posted by kevin on June 21, 1999 at 20:17:34:
Thanks. I was worried that “dealer status” might mean something worse than the profits being taxed as current income.
Dealer Status & Flips - Posted by Kevin
Posted by Kevin on June 20, 1999 at 19:37:05:
Looking to flip contracts. At what point would this be classified as dealer activities? What are the Tax consequences of having a dealer status? Thanks Kevin
Re: Dealer Status & Flips - Posted by Bud Branstetter
Posted by Bud Branstetter on June 21, 1999 at 11:16:35:
If you flip contracts you receive your profit upfront and report that profit in current year. If you separate these, by buying them as a corporation, from properties that you hold then only those in the corporation are dealer properties.
The drawback of being a dealer is no depreciation, no 1031 exchanges and all activity being taxed as current income. If you have a full time job doing something else you are less likely to be classified as a dealer. The more you do the more likely you are to be classified as a dealer. There is no magic number like 4,5 or 6 that makes you a dealer. A lot of it is intent.
The one thing tha gets most people in trouble is carrying the note long term. If you are a dealer and carry the note all of the profit is taxed in current year rather than an installment sale over time. Buy for 25K sell for 50K on a note, all 25K is taxable in current year. When you do the installment sale on a number of properties the IRS may not look at it for several years. BUT WHEN THEY DO-you will owe taxes, interest and penalties. Then they will look at the next year and do the same. Very few could withstand this and survive.