TaQuia are you talking about Land, Residentials, Commercials? From your bullet points, it looks more like a residential/commercial-focused thing...
How to Avoid IRS Dealer Status
I saw a couple of posts referencing LLC structure and most of the advice seems to be to keep things very simple i.e. either in your personal name or preferably an LLC. After hours of legal YouTube videos and reading (sorry Seth, I know you warn against getting stuck at this point), my understanding is this is almost guaranteed to get you tagged as a dealer with the IRS and subjecting you to am additional 15.3% in self employment taxes if it's no set to be taxed as an S or C corp.
My understanding is that the only way around this is to run your active business through an S or C Corp or LLC taxed as a one (I assume). There is also mention of this structure being preferable for seller financing as you lose the ability to defer taxes on installment sales in other entities.
I'm clearly not a lawyer or an expert on this matter and keep going around in circles on it, as I would like to get the foundation right upfront for tax and liability reasons, so I was curious if anyone had any in-depth experience in this.
Some of the videos people might find useful -
In the video below, he explains this better than I can from about 19:00min
Thanks for posting. A lot of this stuff is over my head, but I know it can make a big different to a person's after-tax income. I wonder why the IRS has to make this so complicated?
For anyone interested, we just published a new article in our terms library that correlates with this subject a bit. You can check it out here:
Charlotte Irwin Don't get me started on the IRS. I've had non stop issues for months with them on my personal returns. The only way to try resolve is to call them each time with an average wait time of 3 hours each time.
Seth Williams Thanks Seth, it's a good summary of the impact of the differences. I'm hoping I can be proactive and structure to fall into 1 category vs another for flipping, as the article explains, it makes a material difference on the bottom line. Less of an issue for Buy and hold, but that would be done as a separate entity as the risks (tenants, etc.) are substantially higher.
Seth Williams does this apply to full cash sales as well, or just if you sell via owner financing. **I understand you are not a lawyer or giving legal advise.
A dealer in property is a person who regularly sells property in the ordinary course of their trade or business.
So yes, the dealer status can apply just as much to a cash sale as it can to an installment sale (however, the dealer consequence of paying all your taxes immediately on an installment sale would obviously be a irrelevant for a cash sale, because you'd have all of your cash available to pay it).
The dealer label is mostly about what your intent is with regard to each property. If you bought it with the intent of flipping it quickly, then you're a dealer. If you bought it with the intent of holding it long-term as a buy-and-hold, then you're an investor.
The problem(s) with being a dealer mostly boils down to taxes. This article lays out the biggest advantages a dealer CAN'T take advantage of:
- The depreciation of a capital asset (the investment property).
- Tax deductions on real estate investment-related expenses.
- The opportunity for tax-deferred exchanges, called 1031 exchanges.
- Selling properties on installment sales (which doesn't apply to most residential vacant land properties)
- Favorable tax rates on the sale of properties held over a year (long-term capital gains tax, which is around 15% to 20%).
- Opportunity to offset passive income with passive losses.
As Craig Landman mentioned, there are ways to resolve some of these issues with the right corporate structure - but that's above my pay grade to explain.
Seth Williams, I just listened to the recent podcast episode you guys did with Clint Coons the other day. Did I hear you guys right that the rule about LLCs with Dealer status having to recognize all capital gains in the first year for a property sold on an installment loan doesn't apply to vacant land? I wasn't able to pause and rewind at the time I was listening and forgot about it until coming across this thread.
By the way, congrats on 100 episodes!
David Ludwig that's right! I actually just posted an article pointing out these rules directly from the IRS. You can see it here: https://retipster.com/dealer-installment-sale-land-tax/
Thanks Seth Williams. Looking forward to reading the post and discussing with my accountant because I did an owner-financed deal last year and the accountant indicated I'd have to recognize the whole price as short-term gains / regular income. Not sure if he realized it was vacant land when he made that comment, or not..
Glad I didn't have to file by today! Plenty of time to work all this out.
Seth Williams I saw that post and sent it to my CPA. In short, it ended up saving me $15K in taxable income. THANK YOU!!!
Rob Cassam ALRIGHT! That's what I like to hear!
SuitedConnector Tal Freibergs last edited by
Craig Landman In the video Carl says that (as a dealer) the entire sales amount is taxable but that is incorrect, regarding land sales on terms. Check out Scott Todd's Accounting For Land Investors course.
tmiski Theodore Miskinnis last edited by
Tal Freibergs I recently attended Scott Todd's accounting master class and it was well worth it. The key take aways for me is that, If you're selling "rural vacant residential land", the IRS allows you to use the Installment Sales method for selling financing... and Yes, you are still considered a Dealer. Hope that helps.