Are you an Investor or a Dealer?

The IRS makes a distinction between an investor and a dealer. An investor holds property for a period of time (usually longer than a year) and a dealer develops property or purchases property with the intent to make improvements and sell. An investor receives 1031 Exchange benefits and a dealer does not.

Many investors who buy and sell real estate want to know when they are crossing the line from being an investor to becoming a dealer. Dealer status is one of the largest “gray areas” of Section 1031. A dealer may have properties that are held for resale, but is also entitled to be an investor like anyone else.

The following nine points can help you determine if you fall into the dealer category:

  1. The purpose for which the property was acquired.

  2. The purpose for which the property was subsequently held.

  3. The extent of improvements made.

  4. The frequency, number and continuity of sales.

  5. The extent and nature of transaction in the property.

  6. The general business activities of the taxpayer.

  7. The extent of advertising and promotion of the property for sale.

  8. Whether the property was listed with a real estate broker or other outlets.

  9. The purpose for which the property was held at the time of sale, as opposed to the time of acquisition.

Again, properties that fall under dealer status do not qualify for a 1031 Exchange. The 1031 code does not require that a taxpayer hold a property for a specific period of time in order to effectuate an exchange. But, the code does require that the property was “held for productive use in a trade or business or for investment”. This means that your intent of ownership is more important than the length of ownership. If you review the points above in your particular situation, you can decide (with your tax professional) if you meet the intent of the 1031 code. It is possible for an investor to have one or two of the above “strikes” against them and still qualify. Most dealers will have a problem with a majority of the points. Ultimately, whether a property qualifies is up to the Exchangor and their tax counsel.

For more information, please reach out to your tax professional for specific questions or contact the specialists here at Security 1st Exchange for assistance.