dealer or investor?

O.K, so options may be exchanged in a tax free exchange.  And  yet, most options are fairly short term i.e. an investor contacts to buy  and then assigns his contract ("option") to a more long term investor or  maybe owner occupant.  Doesn't the IRS frown on so-called "dealers" using  1031 exchanges?  Personally, I think investors are investors regardless of  how long they hold the interest in a property but I heard the IRS doesn't  see it that way.  Your take on this?

 

Dear M:  Yes the IRS makes a distinction between dealer and investor.  Any property bought with the intent of short term resale will be considered dealer property (inventory) which will be subject to ordinary income tax and will NOT be 1031x eligible.   Of course sometimes an investor buys a property, with the intent of holding it, and then the market place moves in his favor and he sells it in a very short period of time.  It is really a question of intent.  Intent, in turn, will be determined by all the facts and circumstances in the transaction.   Some facts indicating dealer status are: 1) Holding a real estate license; 2) Frequency and history of similar transactions; 3) Marketing activities related to the property; 4) Accounting and tax treatment of the property while it is held.  Remember, you can be both a dealer and an investor.  If you are you should conduct the two activities under different business entities and keep the businesses separate.  The IRS is well aware of the very different tax treatment of the two activities.  I hope we can help with your investor and 1031x needs.  Sincerely,

Steve Hickox
Attorney / President

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