Posted by Dave T on November 15, 2000 at 17:46:26:
You are not labelled a dealer by the IRS. Instead, the facts and circumstances of each individual transaction are analyzed to determine if the transaction is a dealer activity.
In a nutshell, you are a dealer to any property, when that property is held primarily for sale. This is exactly what happens for your buy-fix-sell-profit strategy.
Since this question is decided on a property-by-property basis, you need only complete the first transaction to qualify for dealer tax treatment.
Posted by ChrisW on November 15, 2000 at 16:39:49:
How many houses are you able to buy,fix and sell before you are labeled a “dealer” by the IRS. Is there a certain number of properties that you can not exceed in a one year period of time, or is it a number that you are not able to exceed in a lifetime? Once labeled a dealer, what are the tax consequences(as an individual, not as a corporation). If you incorporate after you are labeled a dealer is your corporation still taxed the same? Thanks for any input.
Posted by Dave T on November 16, 2000 at 20:23:21:
Q. Once labeled a dealer, what are the tax consequences (as an individual, not as a corporation).
A. The profit from a transaction under “dealer” tax treatment is fully taxable in the year of sale. The profit is treated as ordinary income and taxed at your current marginal tax rate. If you are in the 28% tax bracket, then that is the tax rate for your profit.
Q. If you incorporate after you are labeled a dealer is your corporation still taxed the same?
A. Remember that “dealer” is not an individual designation, but rather a property-by-property determination. Profit from any dealer activity, conducted in your own name, is fully taxed in the year of sale at your marginal tax rate. The tax rate on the first $50K of corporate profit is only 15%. This is just one reason a serious “buy-fix-sell for profit” investor may wish to consider conducting dealer activity in a corporation.
You should also be aware of some other tax considerations for dealer activity. Regardless of whether you conduct your dealer activity in your own name or within a corporation, you cannot use an installment sale to defer realizing your profit, you cannot take a depreciation expense for the time you held the property, and your property is not eligible for 1031 exchange.