If your first house-flipping project ended in a loss, don’t assume you’re limited to deducting only $3,000 per year. Depending on your specific facts, you may qualify to deduct the entire loss in the current year based on the real estate dealer vs investor distinction.
Real Estate Dealer vs. Investor: How the IRS Classifies Them
The key issue is whether the IRS views you as a real estate dealer vs as an investor. Investors generally face the $3,000 annual limit on capital losses. Dealers, however, report their activity as a business, allowing losses to offset ordinary income in full. In many cases, dealer treatment can also reduce self-employment tax.
Qualifying as a dealer depends on more than the number of properties you have sold. The IRS and the courts look at your overall business intent and activities. Factors include why you purchased the property, the extent of your rehabilitation work, how quickly you marketed the property for sale, and whether you conducted the activity in a businesslike manner.
What Determines Real Estate Dealer Status
But dealer status is not always an advantage. If future flips generate profits, those profits become ordinary income rather than capital gains. Dealer property also does not qualify for Section 1031 exchanges or installment-sale reporting.
If you intend to build a house-flipping business, good records are essential. Maintain a written business plan, keep separate books and bank accounts, track your time, and consistently report the activity as a business from year to year.
How We Can Help
Sterling Tax and Accounting is here to help your business with tax planning! Our comprehensive approach to tax planning helps reduce your overall tax liability and keep more money in your pocket. If all your accountant does is file your taxes, chances are they are making you pay more than your fair share of taxes.
Learn how to proactively save on taxes by scheduling a call with our tax planning specialists.
Our tax planning, accounting & business services help you stay on track. Sterling Tax & Accounting will work with you to optimize your business and minimize your taxes. We will work to provide you and your business with the tools and resources you need to build a solid tax and business foundation. We’re a trusted CPA Firm in Sarasota, Florida. We serve clients all over the US, and proactively work to minimize their taxes.
Welcome to the Sterling Standard of business! Want to learn more? Schedule a meeting with our tax planning team.