Dealer or Investor? Capital gains for opportunity zones

[Scott Smith]

Hi,

I have a question that boils down to whether I would be classified as a "dealer" or "investor" in the eyes of the IRS... I am looking for insight from some one with experience on this (real estate tax adviser, CPA, etc.) Thanks!

I am a full-time realtor. I bought a house in 2017, renovated it, and sold in in 2018 (about 10.5 months between closings). I would like to know if I can count that income as short term capital gains by being an "investor" or if it MUST be counted as ordinary income, if I am a "dealer."

From what I have read on the IRS website and other websites, this designation can be a little gray. This was my first flip, and by far the bulk of my income comes from commissions from being a realtor. It seems like IF the majority of my income came from flips, I would easily be a "dealer," but if I only have done 1 flip, could that flip income be counted as an investor since flipping isn't the bulk of the business I do, or income I earn? The flip property was owned in an LLC that my wife and I are joint members of in case that makes a difference. That was a new LLC and that was the only property that LLC has ever owned.

It would be beneficial to count me as an "investor" on this flip since I can then claim it as short term capital gains. Even though short term capital gains is taxed the same as ordinary income, I need the capital gains designation. The reason being that I am buying a property in an "opportunity zone" and can defer taxes on capital gains used to purchase that property based on the benefits of purchase property in designated opportunity zones. I cannot defer taxes on ordinary income, it must be capital gains. So if I can count the flip income as short term capital gains, I can take advantage of the benefits of deferring the taxes by buying the property in the opportunity zone.

I appreciate your insight. Thanks!

[Lance Lvovsky]

Originally posted by @Scott Smith:

Hi,

I have a question that boils down to whether I would be classified as a "dealer" or "investor" in the eyes of the IRS... I am looking for insight from some one with experience on this (real estate tax adviser, CPA, etc.) Thanks!

I am a full-time realtor. I bought a house in 2017, renovated it, and sold in in 2018 (about 10.5 months between closings). I would like to know if I can count that income as short term capital gains by being an "investor" or if it MUST be counted as ordinary income, if I am a "dealer."

From what I have read on the IRS website and other websites, this designation can be a little gray. This was my first flip, and by far the bulk of my income comes from commissions from being a realtor. It seems like IF the majority of my income came from flips, I would easily be a "dealer," but if I only have done 1 flip, could that flip income be counted as an investor since flipping isn't the bulk of the business I do, or income I earn? The flip property was owned in an LLC that my wife and I are joint members of in case that makes a difference. That was a new LLC and that was the only property that LLC has ever owned.

It would be beneficial to count me as an "investor" on this flip since I can then claim it as short term capital gains. Even though short term capital gains is taxed the same as ordinary income, I need the capital gains designation. The reason being that I am buying a property in an "opportunity zone" and can defer taxes on capital gains used to purchase that property based on the benefits of purchase property in designated opportunity zones. I cannot defer taxes on ordinary income, it must be capital gains. So if I can count the flip income as short term capital gains, I can take advantage of the benefits of deferring the taxes by buying the property in the opportunity zone.

I appreciate your insight. Thanks!

It comes down to intent when you bought the property. If intent was to renovate and hold on for some time, then I think you have an argument to classify as short term capital gain.