Many investors that buy and sell real estate want to know when they are crossing the fine line from being an investor to becoming a dealer.
It is one of the “gray areas” of IRC Section 1031. A dealer can have properties that he uses for his business, but he is also entitled to be an investor like anyone else. The best source that can be referred to are 9 points that the tax court used to determine “Dealer Status” in the Klarkowski court case. (The first issue was referred to in the tax court memorandum decision as “Issue 1. Real Estate Transactions )
These 9 points can help an investor to determine if they fall into the dealer category:
· The purpose for which the property was acquired.
· The purpose for which the property was subsequently held.
· The extent of improvements made.
· The frequency, number, and continuity of sales.
· The extent and nature of the property within the transaction.
· The ordinary or general business of the taxpayer.
· The extent of advertising and promotion for sale.
· Whether the property was listed with a real estate broker or other outlets.
· The purpose for which the property was held at the time of sale, as opposed of the time of acquisition.
From a Layman’s point of view, a Real Estate Investor, who buys and sells or Flips properties is a Dealer. A Dealer must be licensed in the state his does business. ie Real Estate Dealer = Real Estate Brokers Lic.
Long term Real Estate Investors, who buy and hold, may not be dealers.
These are questions for your attorneys.