Inventory - Posted by Dave T
Posted by Dave T on May 25, 2000 at 22:22:36:
Let me give you the worst case scenario.
An IRS auditor might construe that all your properties were held for the purpose of selling for profit. It would not matter that you had a two year lease, since your tenant buyer could exercise at any time.
The auditor might argue that you did not demonstrate any intent to hold the property for investment purposes, and really wanted to sell them all along. Thus, the auditor would classify all your property that fits this profile as inventory.
With this determination, all your profit would be recognized and taxable in the year of sale, your depreciation expense would be disallowed, and you could be assessed penalties/fines in addition to back taxes.
If the IRS were to do this to you, all your profits could also be characterized as Schedule C income, and self employment taxes could also be assessed along with the appropriate penalties/fines.
I believe that your strategy could very well have this outcome if your return is audited. The caution here is that your intent determines inventory or investment use. Just leasing for up to two years on a lease/option or lease/purchase does not automatically make your property “investment” property. Your strategy suggests to me that you are in the business of buying property to resell for profit, and therefore your property is inventory.