Uh Oh, Too Late To Avoid IRS Dealer Status?
OK, so I know nobody ever went broke paying taxes on their profits. But I've bought and sold (on a low down payment CD with 2 year balloon) two properties this year and may do the same with a third I just picked up. Will this destine me forever to be given the IRS' dreaded "dealer status?" Is there hope for avoiding this? Should I be offering 2 year L/Os from here on out, or is it too late to clean up my act? Thanks.
There are three reasons why most taxpayers generally would not like to be classified as a "dealer" for tax purposes for a given piece of property.
1. Capital Gains vs. Ordinary Income - if classified as a dealer, the sale could generate the higher taxable rate of individuals.
2. Installment Sales and the dealer question - If taxpayer is deemed to be a dealer on the property, the taxpayer would not be able to use the installment sale method.
3. Tax Deferred Exchanges - Use of the tax-deferral Section, Code 1031, is excluded for dealers.
The Courts determination as to whether one is or is not a dealer is a "facts and circumstance" test, looking to the intent of the taxpayer at the time of disposing of the property.
Courts look at the purpose when acquiring and holding the property; improvements to the property; number of dispositions; extent of the taxpayer's effort to try to have the property sold; activity by the taxpayer in trying to sell the property.
Again the Courts look at the number, extent and nature of transactions in which the taxpayer is involved.
The above factors have been discussed in many "dealer status" tax cases. No single factor controls as to whether one is or is not a dealer.
Good luck.