TaxMamas TaxQuips

Today TaxMama hears from David in the TaxQuips Forum, who defines a dealer in real estate as someone who sells a single property for profit, as long as the intent to act as a dealer to real estate is present.”

Dear David,

You tell us that IRC 453(l)(1)(B) defines a dealer disposition as:

Any disposition of real property which is held by the taxpayer for sale to customers in the ordinary course of the taxpayer’s trade or business

Are you right that one property would qualify?

Perhaps. Perhaps not. Here’s an interesting quote from an article by Cali Zimmerman for NuWire Investor:

Real estate dealer rules can get a bit murky. In fact, “[t]he problem is so severe that, according to the Fifth Circuit Court of Appeals, ‘if a client asks you in any but an extreme case whether, in your opinion, his sale will result in capital gain, your answer should probably be, ‘I don’t know and no one else in town can tell you’’ (J.D. Byram, CA-5, 83-1 USTC para. 9381, 705 F. 2d 1418),” according to The CPA Journal.

The distinction between investor, landlord and dealer is important.

• As an investor, all the expenses are capitalized. The gains are capital gains.


• As a landlord, fixing up a property to rent out, the rental income is passive. The gains are capital gains, except for the depreciation.


• As a dealer, not only do you not get capital gains treatment, but the income and profit are self-employment income, subject to 15.3% self-employment taxes.

According to George Saenz in a BankRate.com article, issues to consider before condemning a transaction to dealerhood include

• Length of time the property is held.


• Number of sales


• Major improvements, like re-zoning and subdividing.


• The owner’s involvement in the sale of the property – are they handling it all themselves (or via their own paid staff), or are real estate agents and brokers involved?

Another issue to consider, that you have not, is the phrase “taxpayer’s trade or business”. Is flipping real estate their main occupation? Is this what they are living on? Probably not.

Generally, you can probably support investor or landlord status if this is not your main livelihood. Do the research properly and you will undoubtedly find case law to support your position if you’re only flipping one or two properties a year, while holding down a ‘day’ job.

And remember, you can find answers to all kinds of questions about real estate dealers, and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama hears from Toni in the TaxQuips Forum, who tells us. “I’m doing my own partnership taxes and am confused about entering information. In 2009, I bought, fixed up and sold 2 properties. [and Toni adds lots of details. ] I’m confused because I’ve added the gain twice from Form 4797. What am I doing wrong?”

Dear Toni,

When you are doing a partnership tax return, you should be using tax software. Consider Turbo Tax Business and H&R Block Premium and Business . The tax software will flow the numbers from any form to all the correct places on the tax return. Some numbers flow to more than one form, for a variety of reasons. When preparing partnership returns, some numbers flow to page 1, Schedule K, Schedule L, Schedule M-1 and/or M-2, the K-1s and who knows where else. Unfortunately, this free TaxMama service is not designed to walk you through the line-by-line preparation of forms. Nor to review your tax return – a good review takes an hour or two.

Also, using Form 4797, there are several potential errors that most people make. Especially when it comes to the recapture of depreciation as ordinary income, computing basis, and how to deal with selling costs and fix-up expenses before sale.

Yes, some of the expenses might go on the Form 8825. Others should be part of basis. However, if these were never really rental properties, if they were properties you bought and fixed up to sell, you would have to capitalize all the expenses, not deduct them. This could be a grave error, with expenses that would be disallowed on audit. And David Toelkes brings up the issue that these properties might be considered inventory – which is an interesting point of view.

Another error is combining properties on one Form 8825. Why would you do that? These are two separate properties with distinct purchase and sale dates and escrows, aren’t they?

The more I think about the implications of the things you’ve written, the more potential errors I am seeing. And why is this a partnership? You keep saying “I”. Do other people own the properties with you? Frankly, if you have partners, YOU should not be preparing a partnership return yourself. It’s one thing to prepare your own tax return involving purchases, sales and fix up of real estate. You can accept the responsibility for any errors you might make. But if you have partners, are you sure you want to expose them to the errors you’re clearly making this tax return?

Your own personal liability as the preparer of this return could be extensive if it is audited and major errors are found. Your partners would hold you liable for their additional taxes, penalties and interest. Do you really want that?

If you can afford all this real estate, you can certainly afford to invest the few hundred dollars for a qualified, experienced tax preparer. Do it. I don’t want to see you getting into trouble.

And remember, you can find answers to all kinds of questions about real estate, and other tax issues, free. Where? Where else? At www.TaxMama.com.

[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]

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Today TaxMama hears from Jami from California in the TaxQuips Forum, who has this question. “My aunt left me her condo and I have to sell it. The deed passed to me a week after I turned 55. Will the 55 & over real estate rule apply to me when I file my tax return?”

Dear Jami,

Sorry to learn about your aunt dying. But how sweet of her to leave you her condo. It’s not clear to me what over 55 rule you’re talking about? Never mind.

Here’s how it works. You need to get an appraisal for the value of the condominium on the date of your aunt’s death. That will be your ‘basis’ or tax cost when you sell the condo. It’s possible that the executor of the estate has already done this. Please find out.

When you sell the condo, your gain will be based on the sales price, less selling costs, less the basis at date of death.

If you lived in the condo with your aunt for at least two full years out of the last five years, you will also be entitled to the $250,000 exclusion of profits since the condo was your personal residence. But you probably won’t need that. There won’t be a gain if you sell it in the same year your aunt died. The real estate market isn’t that strong in California these days.

If you didn’t live in it…try to sell the condo THIS YEAR. The capital gain rate for IRS may be as low as ZERO.

California doesn’t have any special rates. So your gain will be taxed at 9.3% or less, depending on your tax bracket. If there is a gain at all?

And remember, you can find answers to all kinds of questions about inherited assets, and other tax issues, free. Where? Where else? At www.TaxMama.com.

[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]

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Today TaxMama hears from Karla in the TaxQuips Forum, with this question. “Is the loss on surrender of life insurance deductible on 1040?”

Dear Karla,

It’s not clear why you would have a loss when you surrender a life insurance policy. Of course, I don’t have much experience in this area.

Chapter 12 of IRS Publication 17 covers IRS rules about the

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Today TaxMama hears from Karen in California in the TaxQuips Forum, who tells us. “My father died from lung cancer that was determined to be caused by job conditions. My brother and I may be receiving a one-time survivors benefit compensation check for a large amount of money. Will this be taxable income?”

Dear Karen,

How awful about your father! I doubt that any money can compensate you for losing him. Will your benefit be taxable? Probably not. But I would take the paperwork to a good, local tax professional and have someone read the information to see what the money is really paying for. Without reading the documentation, it’s impossible to be certain.

When it’s for lost income – that’s taxable.

When it’s for pain and suffering as a result of a physical issue (like death and illness), it’s not taxable.

There may be other issues in-between.

Odds are, you won’t be facing taxes. But please check, just to be sure.

You and your brother take care of each other. OK?

And remember, you can find answers to all kinds of questions about death-related compensation, and other tax issues, free. Where? Where else? At www.TaxMama.com.

[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]

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