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How to Avoid Dealer Status to Obtain Capital Gains

1.

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%.

2.

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.

3.

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.

4.

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.

5.

Avoid excessive buying and selling. The quicker you buy and sell, the more likely you'll be considered a dealer.

Tips and 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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