You should know: The IRS doesn’t offer the same tax benefits to real estate dealers as they do to investors.
Dealers vs Investors
A real estate investor is a person with long-term holdings.
Real estate dealers buy and sell properties relatively quickly. Wholesaling and flipping would generally be considered dealer activities.
If you’re a real estate dealer, all that real estate activity is considered inventory, and any gains made from your properties are treated as ordinary income, which is taxed at a much higher rate than long-term capital gains.
Workarounds
Classification as a dealer in real property has very harsh consequences, including not being able to apply the capital gains rates to any house that you own.
If the corporation is used to buy and sell houses, the corporation is the one that is legally considered the dealer which may allow you as an individual to retain a more favorable status as an investor entitled to the capital gains treatment.
Seen above: An example of the kind of disclaimer found on scam mail.
Avoiding Dealer Status
Entities like S-corporations and C-corporations will help you avoid dealer status. So, if you’re engaging in “dealer activities,” we can divide your real estate portfolio into two different categories. This way, you can have both an active side and a passive side. This strategy allows you to get benefits from both types of real estate activity.
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Editor’s note: Nothing in this blog post should be construed as advice of any kind. Any legal, financial or tax-related content is provided for informational purposes only and is not a substitute for obtaining advice from a qualified legal or accounting professional.