"Dealer" status

[Brandi T]

Any opinions on how many "buy/sell" transactions it takes to make you a "dealer" in the eyes of the IRS?

[Harrison Painter]

The IRS determines real estate dealer status based on the "intent" of the taxpayer holding or buying the property.

The characterization of gain or loss on the sale or exchange of real property turns on whether the property was held "primarily" for sale or investment.

The Courts have come up with their top fifteen items that they look for in determining the status:

1. Taxpayer's purpose for acquiring, holding and selling the property

2. Number, frequency and continuity of sales

3. Duration of ownership

4. Time and effort expended by the taxpayer in promoting sales

5. Taxpayer's use of brokers

6. Extent of improvements and subdivision made to facilitate sales

7. Ordinary business of the taxpayer

8. Extent and value of the taxpayer's real estate holdings

9. Extent and nature of the transactions involved

10. Amount of income from sales as compared with the taxpayer's other sources of income

11. Taxpayer's desire to liquidate landholdings unexpectedly obtained

12. Taxpayer's overall reluctance to sell the property

13. Amount of advertising

14. Use of a business office for sales

15. Taxpayer's control over any sales representatives

Of these, the most important issue appears to be the number, frequency, and continuity of sales. In other words: If you sell a lot of property, you might be considered a dealer simply because that appears to be the type of real estate "investing" you do. It is also possible to be treated as a dealer on one property and an investor on another.

In this case, the IRS will look at the taxpayer's intent with that particular property. For example, they will look for sales activities that show that property was held primarily for sale if they are attempting to prove dealer status. These activities would include advertising, "for sale" signs, a sales office, and employment of sales personnel.

*Thanks to Diane Kennedy, CPA & tax Strategist