Article Date:
September 2023

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Defining “Real Estate Investor” and “Real Estate Dealer”

Let’s start with the big-time tax consequences of distinguishing between these two classifications.


Profits on dealer sales by individuals are generally subject to taxes at both



ordinary income rates of up to 37 percent,1 and


self-employment rates of up to 14.13 percent.2


In addition, dealers may not



depreciate property held for sale to customers,


use the tax-favored installment method to report their property dispositions, or


use Section 1031 to defer taxes.


Good Tax Breaks for Dealers


Tax law treats the dealer just as it does any business, and that includes some good things for tax purposes.



Dealers treat real-estate selling expenses, commissions, legal fees, and advertising as ordinary business deductions.


Losses on the sale of dealer properties are not limited by the $3,000 capital loss cap that can trap investor properties.


Dealers deduct losses as ordinary losses.


Dealers deduct the losses, generally immediately (but if the losses creates a net operating loss, then over time).3


Good Tax Breaks for Investors


Profits on investor sales are



taxed at tax-favored capital gains rates of 23.8 percent or less, and


not subject to self-employment taxes.


Say you have a $90,000 profit on the sale of a property.



Dealer taxes could be as high as $46,017.4


Investor taxes could be as high as $21,420.5


The investor living in the highest federal tax rate saves $24,597 in taxes (a goodly sum).


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