I own a Real Estate C Corp that Flips properties. I also own a construction/ design company that gets paid from the C-corp through a 1099 each year when I do construction or design services for the C Corp.
Averaging about once every 2 years or so I will buy a property to Flip personally in my personal name not in the C-Corp. Usually this is because I might want to keep it as a rental property or move into it as a primary residence.
I purchased a large home in 2018 that I had planned on Renovating as my primary home.. Well, about 1/2 way through covid hit and renovations stopped for about a year..
I then decided to complete the house renovates and just sell the house.. I held the house for just over 2 years. 2018 bought and sold in 2020.
I also own 4 rental properties that I have held for over 5 years and I'm declaring on my schedule E
My question is would the IRS consider me a Real Estate Dealer? My primary business through the Corp is "Flipping" properties but any property truly bought to be flipped is bought in the corporate name. Also, any properties I buy to "Flip" are bought under my Corporation and are taxes as business ordinary income
Since this home was not purchased with the intent to "Flip" (The reason I purchased it in my personal name and not my Corporation) and since I held the house for over 2 years (past the 1 year long term capital gains rule) Won't this qualify as long term capital gains 20% as opposed to ordinary income tax rate? Net profit is about $100k so it's not a small difference in Tax rate when you include the higher ordinary income rate and self employement taxes.
I own a Real Estate C Corp that Flips properties. I also own a construction/ design company that gets paid from the C-corp through a 1099 each year when I do construction or design services for the C Corp.
Averaging about once every 2 years or so I will buy a property to Flip personally in my personal name not in the C-Corp. Usually this is because I might want to keep it as a rental property or move into it as a primary residence.
I purchased a large home in 2018 that I had planned on Renovating as my primary home.. Well, about 1/2 way through covid hit and renovations stopped for about a year..
I then decided to complete the house renovates and just sell the house.. I held the house for just over 2 years. 2018 bought and sold in 2020.
I also own 4 rental properties that I have held for over 5 years and I'm declaring on my schedule E
My question is would the IRS consider me a Real Estate Dealer? My primary business through the Corp is "Flipping" properties but any property truly bought to be flipped is bought in the corporate name. Also, any properties I buy to "Flip" are bought under my Corporation and are taxes as business ordinary income
Since this home was not purchased with the intent to "Flip" (The reason I purchased it in my personal name and not my Corporation) and since I held the house for over 2 years (past the 1 year long term capital gains rule) Won't this qualify as long term capital gains 20% as opposed to ordinary income tax rate? Net profit is about $100k so it's not a small difference in Tax rate when you include the higher ordinary income rate and self employement taxes.
Thanks for any insight.
Classification of gain as capital or ordinary is determined property-by-property, based on the statutory determination of whether the property is a capital asset or property held for sale to customers in the ordinary course of business. Meaning a person can be both a dealer and an investor.
To determine if the taxpayer is a dealer three questions must be answered:
(a) What is the taxpayer's trade or business?
(b) Did the taxpayer hold the property primarily for sale in that business?
The Supreme Court holds that primarily for sale means of “first importance” or “principally” (MALAT V. RIDDELL).
Determining if property is held primarily for sale to customers in the ordinary course of business is based on the facts and circumstances. Among the facts to consider are the (Ralph S. Norris; Pool)—
i. owner's intent (nature and purpose for which the property is acquired);
ii. the extent of improvements and advertising to increase sales;
iii. number, frequency, and substantiality of sales [this generally is the most important factor (Suburban Realty Company)]; See (c) below
iv. duration of ownership;
v. continuity of activity related to sales over a period of time;
vi. extent and nature of the efforts to sell the property;
vii. the extent of subdividing and development to increase sales;
viii. use of a business office for the sale of the property; and
ix. character and degree of supervision or control over representatives selling the property
Note: Per court case, SUBURBAN REALTY CO. v. U.S: The "holding purpose" inquiry may appropriately be conducted by attempting to trace the taxpayer's primary holding purpose over the entire course of his ownership of the property [Not just time of the sale]
(c) Were the sales ordinary in the course of that business?
Sales are ordinary if they are normal for business, which may be based on their frequency and substantiality
Note: Per court case SUBURBAN REALTY CO. v. U.S: It will remain true that the frequency and substantiality of sales will be the most important factor. But the reason for the importance of this factor is now clear: the presence of frequent and substantial sales is highly relevant to each of the principal statutory inquiries listed above. A taxpayer who engages in frequent and substantial sales is almost inevitably engaged in the real estate business. The frequency and substantiality of sales are highly probative on the issue of holding purpose because the presence of frequent sales ordinarily belies the contention that property is being held "for investment" rather than "for sale." And the frequency of sales may often be a key factor in determining the "ordinariness" question
Note: Per court case TIMOTHY J. PHELAN, ET UX. V. COMMISSIONER: Frequent and substantial sales of real property more likely indicate sales in the ordinary course of business, whereas infrequent sales for significant profits are more indicative of real property held as an investment.
Tips to get capital gain treatment on the sale:
A) If you have an actual investment property and you are a dealer:
Maintain separate book
Document intent to hold the property as investment property in Minutes or other documents
Report expense as investment expense on tax return
B) Insubstantial Nature of the Real Estate Activity
The frequent buying and selling of real estate indicate the taxpayer is engaged in the trade or business of real estate sales. However, taxpayers who can show that the time they devote to real estate activities is insubstantial compared to the time devoted to their normal occupation may be able to preserve capital gain treatment, despite some frequency in sales. Taxpayers who engage in more frequent real estate sales still may be able to prove that the sales represent an investment activity when compared to their primary occupation. This may be particularly true for professionals such as doctors, lawyers, and business executives.
Of course, this question is best left for your personal accountant who knows way more about your business than we do from your brief description. But, based on the limited information we have...
1. The whole issue of dealer v investor is highly complex and controversial, as illustrated in the response from @Ashish Acharya. It is case by case.
2. Dealer classification applies per business. Just because you operate one dealer business, does not automatically extend this tax treatment to other businesses you operate, especially not to other entities.
3. Even if your particular business is a dealer-type business, it does not automatically mean that every deal by such business has dealer treatment. You can have non-dealer properties in a dealer business,. It increases complexity of bookkeeping and is much more challenging to defend in an IRS audit, but it is legally possible.
In your specific situation, it appears quite likely that your property might be treated as non-dealer and use the capital gain treatment. The ultimate answer, as I mentioned, should come from your personal accountant who will consider all relevant facts and ask you additional questions.
