Jacksonville, FL · Member since 2015 · 31 posts · 0 votes
It appears the difference between a 15% and 35% tax bill is whether or not you are classified as a real estate dealer. Many consider you an RE dealer (or at least the IRS does), if you have a way of selling the properties within a year of acquiring them. But then again, it appears the definition of a dealer could vary.
If the intent is to sell the properties (but not at the 35% tax rate), can you just rent the properties say for a year? and sell at any time after the year to avoid the dealer classification status?
The market could go either way in the year so there is a risk in waiting that may cost more than the tax differential and renters could cause damage to property that may require more spending prior to sale but does selling the properties at some time after the year cure the dealer classification issue?
Investor · Howey in the Hills, FL · Member since 2013 · 376 posts · 114 votes
11y
I believe you're talking about short-term vs. long-term capital gains. The 15% would be applied to long-term capital gains (more than one year) and the higher rate would be applied to short-term capital gains (less than one year). There's also the dealer tax, which would be applied on top of the short-term capital gains rate.
I had a tax attorney tell me that I should continually recycle the LLCs I use to flip houses so that there's no established history for the IRS to base the dealer tax on. Run a dozen or so properties through and then dump the LLC. Of course, the IRS could catch you doing that, but apparently it's very unlikely.
I also know guys who have flipped hundreds of houses with the same entity and never got hit with the dealer tax.
In my opinion, the risk and hassle of holding the properties for over a year outweighs the tax savings. Go make money and let the accountants figure it out at the end of the year.