In basic terms, real estate investors purchase real estate with the intention of holding the properties to gain financial return. On the other hand, real estate dealers typically acquire and sell real estate in the ordinary course of their trade or business. The determination of investor vs. dealer is mainly based on intent and activities at the time of purchasing the property and the point of selling the property. For example, if a taxpayer buys a real property that needs improvements, renovate it, and sells it for profit, it is most likely that taxpayer is going to be considered a dealer. 

Is it beneficial to have a dealer or investor status? It all depends on what you’re trying to accomplish and the tax implications involved. For a taxpayer that flips houses (dealer), all the real estate activity is considered inventory. This means that you cannot depreciate the property, and any gains made from the properties are treated as ordinary income, which is taxed at a higher rate than long term capital gains. Dealers are restricted from utilizing section 1031 exchange for tax deferral purposes, and the installment sale method. However, an investor can depreciate the property, utilize section 1031 exchange, and installment sales method. 

The determination as to whether a taxpayer is a dealer or investor in real property is based on several facts and circumstances that may have serious tax implications. Therefore, it is important that the taxpayer document his/her intentions and actions surrounding the purchase/acquisition and sale of the property.

Should you have any questions or need guidance on the tax implications of a purchase or sale of property, please contact a CCN Business Consulting professional for assistance.