In this article, I will share who is a real estate dealer and who is considered not as per the government rules. Plus, what is the primary difference between a dealer and an investor with the tax implications of it? It will be a basic explanation. For more information please discuss this with your real estate attorney.
Who is a Real Estate Dealer Exactly?
In simple words, a real estate dealer is one who buys and sells real estate in a few months, like flipping homes, developing small properties, or doing wholesale. All that is considered property dealing, according to the IRS. There are many factors IRS takes into consideration, whether it’s a real estate dealer or investor. But the primary reason is the real estate tax.
There is a big difference between being a real estate dealer and investing that a few people know, as being a dealer gives you fewer real estate tax advantages and not so open road to do more business like it. The government will not push your business if you decide to become a property dealer. Here are the main differences.
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Real Estate Dealer vs Investor
A real estate investor holds property for long term more than two years. But a real estate dealer buys and sells properties quickly in a few months, like fix-and-flip and wholesaling. You can not tell if he is a dealer or an investor unless you see the time they are involved in that deal. The IRS does not offer the same tax benefits to dealers as it does to investors.
If you are a real estate dealer, all your real estate activity is considered inventory which is not a capital asset, and you don’t want that. Because IRS will treat your income as ordinary income, which is taxed the most, sometimes at high as 30 percent, and for capital asset gain your taxes will be reduced to 10 percent or 15 percent. That is why following government rules can save you a lot of money in taxes.
How the IRS Determines who is a Dealer?
The IRS primarily focuses on the intent. If you buy a property with the primary intent of selling it in the next five months, you will become a real estate dealer, and you have to pay the short-term capital gain tax, which will depend on your total income like everyone else.
But if you buy a property and hold it for at least 24 months, you will qualify as an investor and your taxes will be reduced. But sometimes you can’t wait, you have to sell it. In that case, there are other factors that your tax advisor may tell you for reducing the taxes as much as possible. Please talk to a legal tax advisor to know more about this.
Your Dealer Status Checklist
IRS not only sees the intent, but some other factors can also contribute to the status of your business. Here are the important ones.
- Some normal improvements are okay to increase rents, but extensive improvements for a fix-and-flip tell the IRS it’s dealer property.
- Property acquired as a result of inheritance is usually treated as an investment.
- A dealer will hold a property for a short period of time, fewer than two years, but not the investor.
- If the income generated from selling property consists of a significant share of the total income the IRS will consider it as a dealer. The investment consists of other income and borrowing factors involved.
- They also look at the amount of effort involved in the marketing activity. If it’s higher and at a quick pace, then it’s a dealer, or else, it’s an investment.
A person who buys real estate assets for appreciation and generating rental income is considered an investor. A person who buys real estate with the pure intent of selling it at a profit is a dealer.
This article is only for educational purposes, and I am not a tax advisor. For more information, please consult with your real estate attorney and make a move. IRS may punish you if you do something wrong. So be careful.
So this is what a real estate dealer is and the primary difference between a dealer and an investor. Become an investor, save more taxes, become a dealer and make money fast with a little higher taxes. Both are good, but it depends on how you manage your taxes.