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Real Estate Dealer or Investor? It Matters!

Whether a real estate owner is considered a dealer or investor has significant impact on the tax treatment of the real estate they own.  If an owner is considered a dealer, gains on real property sales are typically classified as ordinary income and taxed at ordinary rates.  If an owner is considered an investor, gains are taxed at capital gains rates.  Also, dealers cannot take advantage of the like-kind exchange rules, whereas investors can potentially defer gains using these rules.

In general, the Internal Revenue Code excludes capital gain treatment on “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.”  Generally, a taxpayer that meets this condition is considered a dealer.  On the other hand, an investor is typically a passive owner who holds property for appreciation.  The distinction between whether a taxpayer is considered a dealer vs. investor is blurry, and because determination is largely considered based on a taxpayer’s motives and intentions, it is an issue that has been heavily litigated.  Here is a brief list of some of the key factors in determining whether a taxpayer is a dealer or an investor:

  • The taxpayer’s intent or purpose at the time of the acquisition.
  • The purpose for which the property is used while the taxpayer is holding the property and at the time of sale.
  • Substantial development or subdivision activities.
  • The number and frequency of sales.
  • Sales activity of the taxpayer.
  • The way in which the property is acquired.
  • Taxpayer’s reputation and public image.


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