Too Many Flips Back Investors Into Tax Corner

By: Kay Bell: REALTOR® Magazine Online
Flipping real estate is a popular strategy these days, but beware — the Internal Revenue Service is watching.

If anyone completes several real estate transaction in a short time, the IRS might consider the property transactions a business rather than an investment strategy, warns Lonnie Davis, a certified public accountant with the Philadelphia office of CBIZ Accounting, Tax and Advisory Services.

If that happens, instead of paying lower capital gains taxes, investors face paying ordinary income taxes, including self-employment tax. And they’ll be unable to perform like-kind exchanges.

What’s the rule of thumb?

"It's a facts-and-circumstances test," says Davis. "There's no rule of thumb that says: Buy three houses, you'll get capital gains; buy five, and you're a dealer-trader. The IRS looks at whether the activity is really a business.”

Davis urges people who buy and sell real estate to ask themselves these questions to avoid running afoul of the IRS:


- How many properties have you bought and sold?

- How often have you bought and sold them?

- In terms of income, is it your primary business?


The IRS is looking to identify dealers because they put more money in the government’s coffers. "There's going to be a wake-up call for tens of thousands of people," says Mark Zilbert, broker-owner of Zilbert Realty Group in Miami.