Example, examples of dealer versus Investor
This is my first post on this account, but I’ve been part of this community for many years. I’m back with a question that I think often gets oversimplified with a lot of boilerplate answers. Let’s see where this goes.
We’ve all heard the usual advice from so-called experts: if you’re regularly buying and selling real estate, you can’t benefit from long-term capital gains. You’re told you need to operate as a business, report ordinary income, maybe even set up an S Corp to reduce self-employment tax exposure.
This line of thinking is usually justified by the IRS’s use of the Winthrop factors. I won’t rehash those here—they’ve been discussed endlessly. Instead, I want to focus on something more concrete: where is the case law?
I’ve spent a good amount of time digging through tax court cases, trying to find real examples of people who were flipping or investing in real estate—people like many of us here—who went to court and made the case that they were investors, not dealers. I came up mostly empty.
Yes, I can find cases where someone bought and sold 50 properties in two years. I can find clear developer cases. I can find cases—mostly from the ’60s and ’70s—where it’s obvious the taxpayer was acting like a business. But I’m not finding relevant, modern cases involving someone who, say, holds properties for a year or two, has a few rentals, and sells three or four houses a year. You know, the kind of activity that describes a huge portion of BiggerPockets investors.
I’ve been investing like this for 18 years. I’ve chased down all kinds of rabbit holes based on advice from self-proclaimed CPA experts and even local CPAs, most of whom insist this strategy can’t fly. If that’s true, then show me the case law. We live in a digital era where tax court decisions are searchable—there’s no excuse for not being able to back up these claims with real examples.
Given the massive increase in house flipping and short-term rental investments in the past two decades, we shouldn’t have to lean on 1960s-era rulings to justify modern tax strategi
but really makes me skeptical as I use ChatGPT to search for these cases as well, and I found a bunch of cases, but upon further investigation, they really weren’t relative to the kindness scenario that I described that most of us operate in.
Thanks, and I look forward to hearing from you