Bankrate.com recently wrote an article on how to distinguish whether you are a dealer or real estate investor for tax purposes. This is an important topic because the IRS dealer status means a real estate investor will pay taxes at their ordinary income rate. Otherwise, a real estate investor is only taxes at capital gains tax. Currently, the individual rate is 15% and corporate is 35%.
The issue with determining whether your transactions will fall under the dealer status is that there are no black-and-white rules.
The gray area is where you have to decide what is right and wait for the IRS to disagree with hindsight. Since both you and the IRS want to hang on to more of your money, the courts have come up with the following factors in determining whether a taxpayer is an investor, versus a dealer:
1. the nature of the taxpayer's business.
2. the taxpayer's purpose in acquiring and holding the property.
3. subdivision, platting and other improvements tending to make the property more marketable.
4. the frequency, number and continuity of sales.
5. the extent to which the taxpayer engaged in the sales activity.
6. the length of time the property was held.
7. the substantiality of income derived from the sales and what percentage such income was of the taxpayer's total income.
8. the extent of advertising and other promotional activities.
9. whether the property was listed directly or through brokers.
Read the full article from Bankrate.
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