If I may generalize… - Posted by Dave T
Posted by Dave T on May 15, 2000 at 16:13:55:
If you purchase property with the intent of reselling at a profit, your property is considered inventory (dealer property), and your profit is taxed as ordinary income at your marginal tax rate. All of your profit is taxable in the year of the sale, regardless of whether you have actually received any cash. You are not eligible for an IRC 1031 tax deferred exchange; nor, can you take depreciation on the property during the time you held it.
On the other hand, if you purchase property to generate cash flow, then later sell it after an appropriate holding period, your property is considered investment property. Your profits are eligible for capital gains tax treatment, you can take a depreciation expense while you held the property, and you can defer capital gains through an IRC 1031 tax deferred exchange. If you sell with seller financing, The IRS will let you spread out your capital gains over a number of years with an installment sale, rather than forcing you to realize all your profit in the year of sale.
While, each deal is considered by the IRS on an individual basis, a pattern of dealer activity will be used to constru your intent for all your deals and can taint your investment activities. Therefore, it is recommended that you conduct your “dealer” activities and your investment activities in separate business entities.
One advantage of doing your “dealer” activity in a corporation is the more favorable tax structure. The tax rate on the first $50K of corporate profits is only 15%. If you choose to have your corporation retain all profits as working capital for future investment, you avoid employment taxes.
Compare this to operating a sole proprietorship. All your profits are not only taxed at your marginal tax bracket, but you may also have to pay self-employment taxes on your earnings (profits).
Suggest you consult a CPA for specific guidance in your personal financial circumstances.