You can have in your real estate portfolio both investor and dealer properties. This distinction is significant for tax purposes.
Here is a snapshot of the potential tax differences:
Suppose you profit $90,000 from a property sale:
- As a dealer, your tax could be up to $46,017.
- As an investor, it might be only $21,420.
That is a potential savings of $24,597 in taxes for investors.
You would look at every property individually to determine its classification and make sure that you identify each property in your records as either an investment or dealer property. Not doing so can lead to complications with the Internal Revenue Service (IRS). I am sure you would not want to rely on the IRS for “mercy.”
How do the courts determine your classification?
- Dealer Properties
- The primary factor is your intention when purchasing and holding a property. Your records play a pivotal role in illustrating this intent.
- Properties meant for sale to customers are dealer properties. If you frequently buy and sell properties within a year, they’re likely considered dealer properties.
- Properties purchased to renovate and sell usually fall under dealer properties.
- Subdividing properties also leans them toward dealer classification unless they meet the specific criteria of IRC Section 1237.
2. Investment Properties
- On the other hand, if your goal with a property is appreciation or rental income, it is considered an investment property.
Remember, each property’s classification is determined independently. Thus, whether it is you or your corporation, owning both dealer and investor properties is possible.
Should you need assistance classifying your properties, give us a call at 954-362-5199 for a consultation.
Hiring a tax resolution expert is the best action a taxpayer could take in a tax matter before the IRS or a state tax authority.
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