Taxing a flip as a rental by leasing the unit prior to sell?

[Account Closed]

At what point is it determined, in the eyes of the IRS, how to tax a flip? For example, if we buy a property with or without the intent of renting it out, and after rehab we place a tenant in the unit, can we sell it as a buy and hold and pay capital gains tax instead of income tax?

[Linda Weygant]

@jeff Copeland...

The issue here is the type of business.

Flipping is self employment.  Rentals are investment and the tax treatment is very different.

In order for a house to be considered for capital gains treatment, it must be an income producing asset.  That income must come other than from the sale of the asset.  The asset must generate income on it's own (ie rental).

For the IRS, they do not care if you buy a house, improve it and sell it or buy bread, lunch meat and mayo and assemble sandwiches - to them, that's the exact same business model.  Only the item being sold is different.

Time held does not matter.

Number of transactions does not matter.

Intent for the property, ability to show history or intent and actual disposition are the only things that factor into the cap gains vs ordinary income decision.