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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11136
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Can funds from a 1099s be used as earned incume

Customer Question

can funds from a 1099s be used as earned incume
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

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SO sorry (Please don't shoot the messenger here) but typically, no, the 1099-s is reporting sales proceeds and IF reported is used to generate a capital gain or loss for the seller

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From an excellent article on this, ...

The Internal Revenue Service requires owners of real estate to report their capital gains. In some cases when you sell real estate for a capital gain, you'll receive IRS Form 1099-S. This form itself is sent to property sellers by real estate settlement agents, brokers or lenders involved in real estate transactions. The IRS also requires settlement agents and other professionals involved in real estate transactions to send 1099-S forms to the agency, meaning it might know of your property sale.

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The only time a 1099-S would associated with EARNED income is when one is "in the business" of buying and selling real estate (considered a "dealer" by IRS, rather than just an "Investor.")

If you're in the business of buying inventory wholesale and selling it at retail, then a house isn't considered a capital asset, and DOESN'T get that lower long-term capital gain rate treatment.

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Here IRS classifies income from buying and selling houses as ordinary income. This means it's not only subject to ordinary income taxes, but also self-employment taxes - Social Security (OASDI) and hospital insurance tax amounting to 15.3 percent of your profit.... so in THAT case, if a closing agent sent a 1099-S it WOULD be considered earned income.

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The factors the IRS takes into account (any combination of the MIGHT make you a dealer)

  • How many deals per year do you do? If you flip just one or two houses per year, that indicates that you’re not a professional dealer. Real estate is just a sideline for you.
  • Do you have an outside job? If you flip properties while continuing to work full time, the IRS is less likely to consider you to be a dealer. Unless …
  • Is your full-time job in the real estate business? If so, then the IRS is more likely to consider your profits to be ordinary income, just like you were operating a retail store selling houses out the back.
  • Are your improvements to property you own substantial? You’re more likely to be classified as a dealer.
  • Are you acting as an agent for the buyer? The flip profits are probably ordinary income.
  • Is the primary reason for holding the property for the purpose of selling it? An old court case, Malat v. Riddell, back in 1966, established that the standard for determining that a property is an investment, rather than inventory, is that holding it for sale is “of first importance.”
  • Do you keep a business office open for the purpose of selling property? Do you have employees or agents presenting or selling property for you? If so, the IRS is more likely to classify your properties as inventory.
  • Did you hold the properties longer than a year? If so, you’re probably an investor, rather than a dealer.

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Sorry for the data-dump, but as you can see, the answer is "it depends." Another accurate answer would be (now that we have a foundation) "only for dealers."

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Hope this helps

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Lane

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