Posted by Steve Heller on March 20, 1999 at 07:46:35:
Thank you Sue for your very insightful comments. I am printing this one for my files.
Steve Heller
Will the IRS let me off the hook? - Posted by Dave (Mi)
Posted by Dave (Mi) on March 19, 1999 at 17:17:50:
If I do a few flips and get classified as a dealer in my 1st year, will I always be a dealer even if in the next few years I hold most and flip only 1 or 2 ?
Thanks for the advise, Dave Mi
Re: Will the IRS let me off the hook? - Posted by Jason-DTX
Posted by Jason-DTX on March 20, 1999 at 01:14:46:
I’m not a lawyer or CPA. BUTTT.
I’ve heard from knowledgeable people that once you get tagged a dealer it is VERY HARD to prove you are no longer a dealer. Its also hard (even if you are right) to seperate dealer property from non-dealer property.
If you are going to do a lot of flips then set up a C-corp to do them in. Its cheap and well worth it. Let the corp be tagged a dealer. You never know, In your old age you may decide to get some rental property. At that time you don’t want to be a dealer. Do whatever you can to avoid being PERSONALLY tagged a dealer.
Do it right from the start. INCORPORATE for flips, especially if you do a lot and don’t have a real job.
Jason
Re: Will the IRS let me off the hook? - Posted by Sue(NC)
Posted by Sue(NC) on March 19, 1999 at 20:53:42:
Really, it’s more of a question of what you are willing to claim.
Dealer status is one of those vague things in the IRC…
If you’re engaged in buying simply to resell, then even one flip could meet the definition of ‘dealer’. But one flip could easily be explained away as an investment that was INTENDED to be long-term, but didn’t work out that way. Since INTENT is key (and nebulous) you end up hearing rumors about where the IRS will decide to draw the line… I’ve heard you are fine if you do:
3 or less
5 or less
less than 1/3 of your income
as well as several combinations of time spent, number of flips, and income received.
The curious thing about dealer status is that if you are a diversified real estate investor, you can have both ‘dealer’ and non-‘dealer’ properties. (My husband & I have some of each). It all comes down to what you are willing to argue should you ever be audited. For instance, we have an apartment building we’ve owned for 6 years (not dealer). We also buy foreclosures, quickly rehab & resell (dealer). We’re perfectly willing to state our case to the IRS.
If you are classified as a dealer for one property, it probably does make the IRS examine your other holdings more closely. But you shouldn’t cave in just because it’s the IRS.
By the way, many people avoid the taint of ‘dealer’ status by holding properties in different corporations. That way, the IRS can’t as easily classify one property as dealer based on another property’s classification.
Re: Will the IRS let me off the hook? - Posted by Steve Heller
Posted by Steve Heller on March 19, 1999 at 17:50:26:
Dave,
I don’t think so. Just because you were classified as a dealer one year does not mean you will be classified that way the next. What criteria are you basing your assumption that you will be classified as ‘dealer’?
Steve Heller, CFP, EA
Licensed to Practice Before the IRS