How to Avoid Dealer Status to Obtain Capital Gains

By eHow Personal Finance Editor

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If you sell real estate regularly, the IRS probably considers you a dealer. But if the IRS doesn't see you as a dealer when you file your taxes, you can stand to save a lot of money. There is a 20% difference in the tax rate between dealers and investors, so take a little effort to avoid dealer status.

Instructions

Difficulty: Moderate

Step1
Know that the goal is to have investor status instead of dealer status. Investors pay 15% on income gained from selling property, while dealers pay 35%.
Step2
Act like an investor in your dealings. The longer you hold a property, the more it seems like an investment rather than inventory for sale. Use the word "investment" on contracts, tax returns and financial statements.
Step3
Don't act like a dealer. Don't maintain a business office that deals largely with the development, advertising and improvement of your property. Focus more on subtle advertising or word of mouth. Consider working from your home.
Step4
If you own multiple lots of land, separate the ownership into different business entities. Create new entities if necessary. Document correspondences between entities so it doesn't seem like they do not operate on the other's behalf.
Step5
Avoid excessive buying and selling. The quicker you buy and sell, the more likely you'll be considered a dealer.

Tips & Warnings

  • You can be a dealer and investor at the same time. Status is determined on a property-by-property basis.
  • The longer you hold on to a property, the more likely you will be considered an investor and not a dealer.
  • Make business transactions follow fair market standards.
  • Walking the line between dealer and investor is likely to raise the suspicion of the IRS. Always be prepared for an audit.

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eHow Article:  How to Avoid Dealer Status to Obtain Capital Gains

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