Real Estate Investing can be taxing – Know What Type of Investor you are (Part 4)

There are four separate real estate investor definitions for IRS tax purposes.

• Real Estate Investor
• Real Estate Dealer
• Real Estate Developer
• Real Estate Professional

Here are the links to earlier posts in the series

Part 1 an introduction to real estate investor types

Part 2 real estate investors

Part 3 real estate dealers

Real Estate Developers

In this post we will elaborate on when an investor might be considered a real estate developer for tax purposes and what the consequences of that determination might be. A real estate developer is not considered a passive activity and would be treated as a business. This is often considered the worse classification that a real estate investor might find themselves in.

Real Estate Developer defined

The simple definition of a real estate developer is someone who takes primarily raw land and develops the property either with land or building improvements. A rehabber can fall into this classification depending on the extent of the rehab and other circumstances.

A property that is not currently considered habitable, but has buildings on it that could be rehabbed would likely be considered a development project. In this case an investor would be considered a real estate developer.

Consequences of being treated as a real estate developer

Developers often have property that remains unsold at the end of the year. This is when the tax law becomes complicated because this property must be treated as inventory and what one might consider as current expenses in most cases must be capitalized as part of the cost of the real property.

Another concern is the recognition of income. When a sale takes place no actual cash might be exchanged because of debts and other considerations, but income still must be recognized. This income can be quite sizeable and is ordinary income as opposed to capital gains income.

Further reading:

http://www.creonline.com/articles/art-247.html http://www.robertsandholland.com/article.ihtml?id=273

http://www.thefreelibrary.com/Developer+required+to+capitalize+real+estate+taxes.-a055806427

http://www.allbusiness.com/personal-finance/individual-taxes-tax-deductions/361766-1.html

http://articles.directorym.net/Real_Estate_Investor_Tax_Categories-a946163.html