According To Irs What Is A Flow Through Entity 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 face the problem of being branded as “dealer status” by the IRS for tax purposes. This is a very dangerous matter. Dealers, like real estate agents, are considered self-employed and subject to a self-employment tax of 15.3%. Even worse, the dealer cannot pay taxes on an installment basis when using owner financing. All taxes must be paid on the property even if all taxes have not yet been received.

The most important factors the IRS uses to determine whether someone is a real estate dealer are the frequency of selling properties, the number of properties sold in a year, and whether there is consistency in the process of flipping properties. The true purpose of the business. If the property is held for more than a year before it is sold, it may also weigh against the investor’s consideration of the activity of a “dealer”.

There are several ways to handle significant transactions each year and still retain the tax advantages of being an investor as opposed to a dealer:

1. Flip properties through a limited partnership, self-directed IRA, Coverdell Education Savings Account or single 401k plan. In a Limited Partnership only the General Manager will be considered as a dealer. Trusts and various types of self-directed retirement and savings accounts are considered passive investments and do not actively participate in the plan business.

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

3. Place each asset in a separate LLC or trust and transfer the assets to the LLC or trust instead of inside the entity.

4. At a minimum, take care to separate your wholesale fix and flip business from other business activities such as your “buy and hold” operations or any deals that involve installment sales.

Planning how you will fund and hold your property can be just as important to determining the success of your real estate investment as the actual selection of the property you decide to purchase. To be branded with dealer status you have to spend big time in the long run. Make sure you bargain smart!

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