Selling Owner Financed Homes Better As A Business Or Investment Avoiding Dealer Status When Flipping Houses

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Avoiding Dealer Status When Flipping Houses

Any investor who flips more than one or two properties a year will run into the issue of being branded with “dealer status” by the IRS for tax purposes. This is a very dangerous thing. Real estate agents, like dealers, are considered self-employed and subject to a self-employment tax of 15.3%. Even worse, a trader cannot pay taxes on an installment basis when using owner financing. All taxes must be paid up front on the property, even if all payments have not been received.

The most important factors used by the IRS to determine whether or not someone is a real estate dealer are the frequency of selling properties, the number of properties sold in a year, and whether there is a continuity in the process that suggests flipping the property. The true intention of the business. If the assets are held for more than a year before being sold, it may also be weighted to consider the activity of an investor as a “dealer”.

There are several ways to handle a significant number of transactions per year and still maintain tax benefits as an investor as opposed to a trader:

1. Flip properties through a limited partnership, a self-directed IRA, a Coverdale education savings account or a single 401k plan. In a limited partnership only the general manager will be considered a dealer. Trusts and various types of self-directed retirement and savings accounts are considered passive investments and these plans do not involve active participation in business.

2. Create a joint venture agreement with an active investor or agent who will essentially create a “for you” investment strategy for wholesale buying and selling. That joint venture partner may well be considered a “dealer” but you will not be directly involved in any property flipping activity unless you or your organization is in title.

3. Place each asset in a separate LLC or trust and transfer the LLC or trust rather than the assets within the entity.

4. At a minimum, be careful to separate your wholesale fix and flip business from other business activities such as your “buy and hold” operation or any deals involving installment sales.

Planning how you fund and hold your property can be as important to determining the success of your real estate investment as the actual selection of properties you decide to purchase. Being branded with dealer status can cost you big time in the long run. Make sure you’re making deals the smart way!

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