Have Tax Questions? Ask a Tax Expert for Answers ASAP
If you just want to buy the properties and then sell them for a profit, (and not get the licensing to be an agent and sccept commissions) this is no problem
Real estate agents have to be licensed by the real estate board in your state, and this qualifies them to accept commissions for the sale, (an listing as the buyers agent as well), on real estate sales
Some will get the licenses so that they aren't paying commissions out to others, thereby increasing profits
Some only deal with buyers who use FSBO (For sale by owner) title companies and avoid the commissions that way
YOu don't have to be an agent or realtor to simply invest in a property and the sell it for a profit
I want to do this as an investor not an agent, I have been informed that if you do this as an individual and you are flipping over 5(?) properties, the I.R.S. can consider you as a dealer thus losing many tax benefits.
Ahhh what I think you may be talking about here is the 25,000 loss allowance
The ability to deduct your rental property losses against your ordinary incomes actually requires that you DO participate in our business of buying, renting, etc.
This boost in profits is what lawmakers had in mind when they enacted the $25, 000 active participation rental property loss allowance as a special favor for rental property owners who qualify.
You qualify for the full allowance of up to $25, 000 in rental property loss deductions if
If you don't qualify for this, then your capital losses can only be used against capital gains you may have, as opposed to any other type of earned, ordinary, income
The $25,000 tax-favor allowance applies to rental real estate. It does not apply to other rentals such as equipment leases.
no, are you aware fo what constitutes a "real estate dealer" as defined by the I.R.S ?
My apologies, most here are asking about the passive loss limitations ...
yes - The IRS will, at their discretion, determine if a taxpayer is a dealer. Once they make that call the taxpayer will then be paying ordinary income tax rates instead of the much lower long term capital gains rates.
You see, investors are long term while dealers are more the get in, get out ASAP variety. The IRS doesn’t want dealers to benefit from the much lower long term capital gains tax rate. In many cases it’s less than half the taxes of what a dealer would pay.
Internal Revenue Code § 1221 says a capital asset is, (in part) “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.”
What that means to you is simple — if the property you buy is meant for your ‘trade or business’ and not for investment, you’re gonna be designated as a dealer — at least as far as that particular property is concerned. Your tax rate is then automatically derived from ordinary income tax rates which will almost always be double (usually more than double) the long term capital gains rate.
IRS will VERY quickly tell you that rules of thimb like 5 properties in so long a time will not hold water.... they look at each and every transaction on it's own merits if they decide to audit you
How long you hold the property and how many properties you’ve been selling lately is what they want to know. The longer you hold the better you look.
Good, then can you tell me what Corp. structure can I create so this will not be a problem? LLC vs C-corp?
Just a couple mor points here, ... might help you see around some corners....
If you’ve been buying and selling properties like a dealer, then sell one 14 months after buying it, they’re gonna call you a dealer. At that point you’re treated as guilty until you or your CPA or tax attorney prove you innocent
ONe last thing ....
The courts don’t make it any clearer either. They add their own brands of mud. Each court decision is yet another layer — and that doesn’t count the courts of appeal ... and finally ... Another factor is what you do with the property. rezone it? Make massive improvements meant to significantly improve value? Or God forbid, subdivide it?
And for the record? Real estate investors nearly always do far better over the long haul, (and usually the short haul too) than dealers.
Ok that's the extent of my wisdom there
On the entity
S-corps, LLC's and C-Corps are separate entities, they separate your personal assets from the business assets (fo the purposes of collectors, lawsuits and any other sort of liabiity
On the tax front? C-Corps and irrevocable trusts are the only ones that pay taxes themselves, at separate rates ... LLCs S-corps partnerships and sole proprietorships all pass the tax losses and profits to the individual taxpayer on line 12 of the return (business income or loss)
C-Corp? ... double taxation ... Once the C-corp has paid it's own taxes, then the owners are taxed again on the profits as dividends
S-corp is probably a better pass through than an LLC because you don't pay self employment tax on the excess profits over and above your salary ... LLC's partnerships sole proprietorships ALL pay self employment taxes on ALL profits
again yes, I know about the various entities and their tax ramifications, which one protects me from being considered a real estate dealer is my question.
The corporate structure has nothing to do with the distinction between being a dealer and an investor with one EXCEPTION... a C-corp doesn't have capital gains ... it's all income at whatever your corporate rate is (and again, then taxed to you personally if you want to pull money out as dividends)
So, in effect, the answer to your question is that there isn't one. It's not that simple ...C-corps don't get that capital gain treatment you're looking for and all the others are pass throughs, hence, the distinction can't be avoided by virtue of your entity choice
Sorry, don't shoot the messenger
Different expert here
You asked for specific information that the IRS would use to judge whether or not you have an investment property or if you could be considered as a professional realtor.While there is no magic formula, the IRS does look at these:
Flipper / Dealer or Real Estate Investor - The Tests
The most important factors used to make this call are the INTENT and PURPOSE of the property acquisition and holding. Some of the criteria used by the IRS and the courts to determine intent and purpose include:
Length of time the property is held - Normally an asset needs to be held for over one year to qualify for capital gains treatment. This is true of real estate, but this is not a definitive test. Just because property is held for over one year does not necessarily make it investment property.
Number of properties sold in a year – There is no set number, but if you sell only one property in a year, you are probably NOT a dealer.
Have a job outside of real estate? – If your primary job is not related to real estate, you are probably engaged in real estate investing.
If you are a real estate broker, real estate developer or associated with a real estate company, you are likely to be considered a flipper / dealer.
Have employees who help you sell the properties? – If you have employees who help you sell real estate, you are likely to be a flipper / dealer. Use a business office to sell properties? – If you sell properties out of a business office, you are most likely a flipper / dealer.
I truly hope this information is helpful but please do not rate until you are satisfied. If you want to click on 1 or 2 just click on the continue to work with me button instead. You will then be able to add any other info or respond to what I have posted so far. Rating 3-5 gives me credit and a good rating but you can still converse with me.