All Forum Posts by: Eric Brown

First thing, do not rely on what I've written here as tax advice. Every situation is different and requires a complete analysis of all the facts and circumstances before making decisions. I am a tax expert, but cannot advice on tax relevant decisions until we've completed and signed a full client engagement letter and I have a full understanding of your situation.

I'll give an example from a client of mine from last year with the names changed to protect the innocent of course.    Client had the following sales in 2016:

House purchased in early 2000s, variety of repairs and improvements done over the years, never rented, sold to a home owner in 2016.  We gave her dealer status on this one and capital gains.  The home was in an area of Cincinnati that's gone through quite a renaissance over the last 15 years.  Her intent in purchasing it was to ride that market, and the only reason she finally sold it was to cash in on the appreciation.

Two houses purchased during 2016.  She put in some quick work and them both sold by the end of the year.  Classic flip and yes they were classified as dealer sales.  Big tax bill.

House bought in 2015, had a family member living in it and paying nominal rent while she marketed it for sale and turned around in sold it in 2016.  Another dealer situation.  Even though she rented it, her intent all along was to turn it around and sell it to an end user.  The biggest factor supporting this was she was marketing it for sale during the entire period.

Final example, house was purchased in 2008 and rented continuously through 2016.  It consistently unperformed, and she decided to sell in order to free up cash flow for other purchases.  This was an investment situation as the her intent was to hold for long-term rental, and she only sold it because it wasn't performing.

VRBO, vacation rentals by owners, is going to fall in to the same circumstances as these two rental examples I described above.  Once again, when its a property they've rented for awhile, their purpose was to rent, and then decided to get rid of it because it wasn't performing or just didn't want to deal with it anymore, you have an investor.  However, if all along they hold onto the property with the intent of selling it off to a new home owner, but maybe do a week or two vacation rental here and there to fill in the gaps, you have a dealer situation.  Personal use of vacation homes is another factor that comes into play but not so much for the question of dealer vs investor but more whether expenses like real estate taxes or utilities are tax deductible.

Once again, do not rely on what I've written here as tax advice.  Every situation is different and requires a complete analysis of all the facts and circumstances before making decisions.  I am a tax expert, but cannot advice on tax relevant decisions until we've completed and signed a full client engagement letter and I have a full understanding of your situation..

This seemed like a good topic for new comers to the real-estate profession:  are you a dealer or an investor?  The answer can mean paying 15% income taxes on selling a property or 25%, 27%, 37% or more depending on your tax bracket.  The answer to the question, like all things in taxes and accounting, is of course it depends.  Generally, dealers are making money on a house sale by selling it to an end user (i.e. home owners).  So, this would include flippers, agents, and developers.  Investors on the other hand hold onto a property like a stock.  Their goal is to make money on the appreciation in value.  So, rental properties generally are investors.  They're getting money off rental income over the years, but when they turn around and sell it, the money they made was from its appreciation.  The determination of dealer vs investor ultimately falls into the oh so clear and concise (note the sarcasm) income tax concept of "all the facts and circumstances."  Note that in my examples above I said generally because there are exceptions to all of them where the other classification applies.  There are a number of tests you have to consider, and that is my purpose for this discussion.  Please ask me your questions, and I'll help relieve the burden of this particular tax code enigma. 

My default is to treat rentals as a trade or business.  The case law seems favor taxpayers.  So, follow on default then is yes issue 1099s, but as Mike said above, it is very often not acted upon by the client.