Ordinary income tax vs Capital gains

[Leah Thompson]

Just getting started… and so much to learn. We bought our first property at a foreclosure auction with plans to turn into a rental. Single-family home with large yard, as we learn, now rethinking our strategy.

If we sell now, are we considered dealers and taxed on ordinary income plus a self-employment tax ? How do we get it considered an investment and be taxed capital gains? We formed an LLC and purchased the property through it. The only good part about our learning process and doing it slowly on the side is that we have held it for over a year. We've also thought about a 1031 exchange though concerned we wouldn't be able to find another property soon enough.

[Ashish Acharya]

No, it will not be ordinary if you can prove the initial intension was rental. 

If you were already in the business of flipping, then it would look risky, but you are not.