I am assuming that you are referring to the fact that as a house flipper you will be paying ordinary income rates rather than the lower capital gains tax rates.I suppose you can look at this as a penalty, but I wouldn't look at it that way. 

But check out below what he said to me in regards to this: "First, there are depreciation issues among many other possible factors on the tax return which would be calculated into the K-1 numbers, along with the fact that there would be capital gain/loss rather than ordinary income.

Ordinary wear-and-tear does not require painting an entire room every three years.

If you were flipping the home and selling it, you would pay ordinary income on the gains.

Certainly there are tax consequences but LT Capital gains better than ordinary income.

@Micaiah Cormier , Fortunately, if cap gain was your concern, flipping income is an ordinary income taxed or ordinary income tax rate both at state and federal level.

The name is not ordinary and only 1 person came up with that name  The phone number is a Wash DC area code and all the crimes were in MD counties just outside DC . 

It will be reported as rental income.You will also be entitled to take ordinary and necessary deductions used to upkeep the rental business which includes items like repairs, utilities, mortgage interest, real estate taxes, depreciation etc.

Many people wouldn't think about the tax implications of this until after the sale...and you're on the right track.Selling land that you developed would qualify you as a "dealer/developer" and the whole gain would be ordinary income and subjected to self employment taxes.

The industry term for this is “dealer property” there is a great deal of case law on the issue as to what you should be considering in performing this analysis.If the property is treated as inventory, the gain is ordinary income, not capital gain.A conservative approach is to hold the property 2-years post completion to treat it as a capital asset.You should speak to your tax advisor on this issue as it is a complex analysis.