Re: taxes on quick flips? - Posted by E.Eka
Posted by E.Eka on October 16, 2003 at 09:27:58:
The main problem that the IRS has with the dealer/investor designation is the treatment of the flip. The IRS wants you to be a dealer because then your profit from the flip is basically from inventory (of houses), so it is included as ordinary income and you pay tax according to your marginal tax rate.
An investor will be subject to capital gains tax which of course are lower and treated differently then ordinary income.
In the same token, if the IRS contests your assertion that you’re an investor, you’ll most likely lose if you’re a rehab/flipper. Many people confuse and misuse the term capital gains, and they assume that because you purchase a house or two that it’s a capital asset. If your business is primarily buying houses, keeping them short term and then selling them, you are a dealer and you’re in the business of buying and selling property. It’s not an investment for tax purposes, nor is the income generated considered to be passive income. You’re actively participating in the business, so by nature it’s not passive.
If you buy and hold property (rental/lease options)then it could be considered to be a capital asset, and therefore qualify for capital gains/losses. As well as be subject to capital gains tax.
Each case is different, but because there are so many investors/dealers etc. The IRS is considering paying closer attention to their treatment.
I’m pretty sure I’m right. But if someone can dispute it, I’d be willing to hear it. I’m a tax accounting analyst myself, but run it by your accountant to say what he/she says.