long term and short term gains and losses

[TrustUser]

my involvement is very minimal - nothing like a typical flipper in business is like.

i can either lend money out, or try this route. i figured flipping properties helps others, in the sense that people are employed, products are bought, neighborhoods are improved, etc.

but if the feds force a bunch of extra crap on me, then i will simply choose not to do it at all. i have about as much involvement in this as when i lend my money - and i want to keep it that way.

i retired for a reason - LOL

 

[davew9128]

thank you dave, tm, ldij, payrollhguy, and all others who have contributed. i will always be the sole owner. i would prefer not to rent them out. but if you guys think that would reduce my chances of being considered a dealer, then i guess i might need to go that route.

I don't think renting it out is proof either way. One could be a flipper who rents the property to make it productive because it is having difficulty being sold. The property sale is still a flip when it happens. One could be a professional landlord type who lives off rents who decides to sell a property shortly after purchase because an overwhelming offer to buy comes in. The sale is not a flip. I'm in a high cost of housing area and have seen both.

 

[TrustUser]

i would not want to say it is 100% proof. but i do think it is getting me a lot closer. also i dont think they are using the term "dealer" to be synonymous with "flip". i truly do not think that the irs would consider me to be a "dealer", such that i am expected to pay self-employment tax, etc. but i dont know for sure. so i am glad i am getting some feedback about it !!

 

[TrustUser]

plus i would like to get this carryover loss off my books !! especially since i am probably adding 75 to it. if i can only reduce it 3 a year, i will be 150 before it all comes off - LOL

 

[TrustUser]

hi dave, doing a bit more research, let's use dealer and flipper to be synonymous. holding period does seem to be a very significant point. 2 years is considered safe. 1 year is fairly safe. another thing in my favor is whether seller has a day job or other income to support himself ? or is the sale of this real estate his main source of income ? in my case, the sale of these "flippers" is nowhere close to being my main source of income, which is why i always thought of it as investment income !! i am simply transferring the funds that i would have otherwise loaned out in a hard money loan, and instead am fixing up a property.
i am also very different from flippers in one regard. i actually tell my realtor to take the time to do things correctly, and not like a cookie cutter job, where corners are usually cut. i think i am significantly different from the typical flipper.

 

[Taxing Matters]

hi dave, doing a bit more research, let's use dealer and flipper to be synonymous. holding period does seem to be a very significant point. 2 years is considered safe. 1 year is fairly safe. another thing in my favor is whether seller has a day job or other income to support himself ? or is the sale of this real estate his main source of income ? in my case, the sale of these "flippers" is nowhere close to being my main source of income, which is why i always thought of it as investment income !! i am simply transferring the funds that i would have otherwise loaned out in a hard money loan, and instead am fixing up a property.
i am also very different from flippers in one regard. i actually tell my realtor to take the time to do things correctly, and not like a cookie cutter job, where corners are usually cut. i think i am significantly different from the typical flipper.

It's important to understand that the determination is made under a facts and circumstances test. There is no one factor that is controlling. The rule that applies comes from the Treasury regulations that address FICA (Social Security and Medicare) taxes because that's where the bulk of the litigation comes from. The reason for that is that most flipping occurs with properties held less than a year, so the profit made is taxed at the same income tax rates whether it is business income or short term capital gain. As a result, in most cases the taxpayer with the gain from a short term flip will not care much if it is business income or capital gain because the income tax will be the same (other than your situation of wanting to offset capital loss). But if the income is business income, then it is subject also to FICA taxes, and that then is what traditionally raised the litigation issues. The basic rule is summarized in an unreported decision of the 11th Circuit Court of Appeals as follows:

A person who is engaged in the business of selling real estate to customers may be characterized as a real estate dealer; however, an individual who holds real estate for investment or speculation and receives rentals therefrom is not a real estate dealer. 26 C.F.R. § 1.1402(a)–4(a). Whether a property is held for sale to customers in the ordinary course of a taxpayer's business is a question of fact, and must be considered on a case-by-case basis. See Major Realty Corp. and Subs. v. Commissioner, 749 F.2d 1483, 1487–88 (11th Cir.1985). “The ‘holding purpose’ inquiry may appropriately be conducted by attempting to trace the taxpayer's primary holding purpose over the entire course of his ownership of the property.... Thus, the inquiry should start at the time the property is acquired.” Suburban Realty, 615 F.2d at 183–84 (internal citations omitted).​

​

Wood v. Comm'r, 138 F. App'x 168, 173 (11th Cir. 2005).

While the time the property is held, the amount of time you spend on the activity, what other sources of income you have, etc., are things that are considered, it's not the case that there are safe rules like holding the property for two years would always make it not a business activity. Thus, as I said before, I'd want to see all the facts of the activity before deciding on whether it was a business activity or not. All I can really tell you is that you are likely good if you only do an occasional flip here and there and that you are less likely to have problems if the properties are held for several years rather than several months. The more regular and continuous the activity is, the more likely it is to be a business. But you have to look at the total picture painted by the activity you conduct to really get a feel for whether it's a business activity or simply real estate investment.

 

[TrustUser]

thanks tm,

i still can not tell what you think of my situation ? i was hoping to make it regular and continuous, just like i hope my loans are regular and continuous. making 1/10% at the bank is not accomplishing much !! but i would never consider myself to be in business, cuz i dont do anything, except send my realtor funds when she needs them. i know that i would choose not to do it at all, if i had to pay 15.3% self employment tax. i would be much better off just doing loans, at that point.
i have a very high degree of trust in my realtor's honesty and competency. much moreso than i do in any hard money broker. because of that, i think my risk is less. and i am helping others along the way. i just dont want to be penalized for doing so !!

 

[TrustUser]

do you think i could contact the irs directly, and get a ruling from them ? i am not trying to hide anything. either they want me to help create jobs for others, or they dont. they probably make a lot more money (when you count the taxes on everyone else's income, including my own), by me fixing these houses, than they ever would on me just making a loan.

 

[FlyingRon]

As someone else pointed out, this is what S-Corp tax status excels at. As long as you pay yourself a reasonable wage (and pay the FICA/SE taxes on it), the rest of the profits come as a dividend. Of course, the FICA/Medicaid contributions are still capped so depending on how much other FICA income you have, this might not be a deal at all.

 

[TrustUser]

hi ron,

i simply dont want to have that sort of involvement in all of this. setting up a corp, etc.

but i do sorta chuckle at "a reasonable wage" - i dont do much of anything - LOL

 

[Taxing Matters]

thanks tm,

i still can not tell what you think of my situation ? i was hoping to make it regular and continuous, just like i hope my loans are regular and continuous.

The problem is that I can't give you a firm conclusion without seeing what you actually. Telling me that you hope it will be regular and continuous activity makes it sound more like a business but without seeing what that actually means in real transactions I can't say whether it crosses that line.

but i would never consider myself to be in business, cuz i dont do anything, except send my realtor funds when she needs them.

Well, some CEOs or sole shareholders of businesses don't do much either and simply delegate everything out. Doesn't keep it from being a business anyway. You are at the very least making the decisions of whom to hire, what authority to give them, the general outlines of the work to be done, and what to do with the money that is made. Again, though, you have to look at the total activity involved which is what makes this so difficult. It's why tax professionals (especially non lawyers) often groan when they here an issue is subject to a facts and circumstances test. There are no real bright line tests that we can give you that, for example, selling less than X places will be investment and selling X or more would cross the line to a business.

do you think i could contact the irs directly, and get a ruling from them ?

You can. But getting a private letter ruling (PLR) from the IRS takes months and is very expensive. Moreover, the PLR is based on the exact facts you give the agency. If your planned series of transactions turns out different than you describe in your request, i.e. more or less sales in the year, the details of them change, etc., from what you anticipate, the PLR you get may be worthless. Note, too, that you must attach a copy of the PLR to your tax return, which is going to pique the interest of IRS examination and may increase your risk of audit.

As someone else pointed out, this is what S-Corp tax status excels at. As long as you pay yourself a reasonable wage (and pay the FICA/SE taxes on it), the rest of the profits come as a dividend. Of course, the FICA/Medicaid contributions are still capped so depending on how much other FICA income you have, this might not be a deal at all.

Just to be clear, a S-corporation does not help with the determination of whether the flipping would rise to the level of a business activity. It can help reduce the amount of business income that is subject to FICA taxes over operating as a sole proprietor, however.

 

[TrustUser]

i guess that is what i was hoping to get from you - a bright line test

i dont get too involved though, with the contractors who do the work

my realtor knows the area - if she tells me she has something for me to buy, i tell her i will buy it. if we are able to purchase it, she has all the contacts that she knows personally.

i will give her feedback if she asks for it. but that has not been very often.

i feel comfortable that my level of involvement makes my case, stronger

but as you said, that does not mean it is not a business

from what you just described, i will definitely forget about getting the private ruling letter - that seems to work more against me, than it does for me

i think the reason that the s-corp was mentioned was because of the self-employment taxes - i am definitely not gonna complicate things for me, that i have to create another entity. i already have to deal with my pension return each year.

thanks everyone for all your input

 

[LdiJ]

Just to be clear, a S-corporation does not help with the determination of whether the flipping would rise to the level of a business activity. It can help reduce the amount of business income that is subject to FICA taxes over operating as a sole proprietor, however.

Which was exactly the point I was making some posts back, when he got so dismissive about an S-Corp. Admitting that it was a business activity but since he is so "hands off" limiting the amount that ends up being subject to FICA taxes.

 

[Taxing Matters]

i guess that is what i was hoping to get from you - a bright line test

I wish I could give you one. There just isn't one for this, unfortunately.

 

[TrustUser]

thanks again everyone,

i think i have resolved the matter. from what i am hearing from you guys, what i am currently doing would eventually cross that line

i just talked to my realtor. she is happy to rent the properties out for me. so after these initial 3, i will be keeping them for at least 1 year.

this gives me a long-term gain, and cuts down in half or more, the number of properties that i will be obtaining

to start things off, we got 3 inexpensive properties, so i could get my feet wet. from hereon out, i will be getting more expensive properties, again cutting down on the number of properties that i obtain

if at some point in the future the irs tells me they dont like what i am doing, then que sera sera - i can always go back to lending money

i dont allow finances to control my life