I have great news! You can have in your real estate portfolio both investor and dealer properties. This distinction is significant for tax purposes.
Here’s 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’s a potential savings of $24,597 in taxes for investors!
You look at every property individually to determine its classification and make sure you identify each property in your records as either an investment or dealer property. Not doing so can lead to complications with the IRS, and believe me, you don’t want to rely on the IRS for “mercy.”
How the courts determine your classification:
- 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.
On the other hand, if your goal with a property is appreciation or rental income, it’s considered an investment property.
Remember, each properties' classification is determined independently. So, whether it’s you or your corporation, owning both dealer and investor properties is possible.
Green Krist, CPA specializes in assisting taxpayers with IRS and North Carolina Department of Revenue issues in the greater Raleigh, North Carolina area.