🏘️ Are You a Real Estate Dealer or Investor? (And Why the IRS Cares More Than You Think)

Are you flipping houses like you're on an HGTV marathon? Or holding onto your properties like they're fine wine, waiting to appreciate with age? The IRS draws a hard line between being a real estate dealer and a real estate investor, and trust us—this is one label you don’t want to get wrong. Because when it comes to taxes, the difference could cost you tens of thousands of dollars.

🚨 Dealer vs. Investor: Why It Matters

Let’s break it down with a metaphor. If you're a dealer, Uncle Sam treats you like a car lot—everything is inventory, and you're taxed at high rates like a regular business. If you're an investor, you’re more like a landlord with patience—you get perks like capital gains rates and depreciation.

🤝 Tax Treatment Showdown

Dealer

• Dealer Investor Pays ordinary income tax rates (up to 37%) and self-employment tax 15.3%

• No depreciation—inventory doesn’t depreciate!

• No 1031 exchange (sorry, flippers)

• Can deduct sales expenses as business costs

• Cannot use the installment method

• Subject to Section 199A deduction

• Not subject to Net Investment Income Tax (NIIT)

Investor

• Pays capital gains tax (0%, 15%, or 20%)—no SE tax

• Gets depreciation, Section 179 expensing, and more

• Can defer gains with 1031 exchanges

• Sales expenses reduce capital gains basis

• Can report sales using the installment method

• May also qualify for Section 199A

• May be hit with NIIT (3.8%)

📊 Real-Life Example:

Sell a property, make $100,000 profit.

• As a dealer, you might owe up to $51,130 (22% income tax + 15.3% self-employment tax).

• As an investor, your tax might be $23,800 (15% capital gains + 3.8% NIIT).

💸 That’s a $27,330 difference—enough to buy a Tesla Model 3 or a very relaxing vacation.

🕵️‍♀️ What Makes You a Real Estate Dealer?

There’s no magic number or secret handshake that makes you a dealer. But the IRS and courts use 8 key factors (like an awkward dating checklist) to decide:

1. 📈 Number & Frequency of Sales – Flip 71 homes in 3 years? Yeah, you’re probably a dealer. Sell two over ten years? More likely an investor.

2. 🎯 Intent When Buying – Did you buy it to sell ASAP or to collect rent and build wealth? Your original purpose matters.

3. 🔨 Level of Improvements – Gut renovations? Dealer. New paint and carpet for tenants? Investor.

4. 📣 Marketing Efforts – Do you have ads running like it’s Black Friday? That screams dealer.

5. 🎁 Acquisition Method – Inheritance or foreclosure leans investor. Hunting the MLS daily? Dealer vibes.

6. ⏳ Holding Period – Quick turnarounds = dealer. Long-term holds = investor.

7. 💼 Portion of Income – Is real estate your bread and butter or just the side salad?

8. ⏰ Continuous Effort – Dealers grind all year. Investors check Zillow and call it a day.

🧠 Real Estate Investor, Defined (The Chill Cousin)

Investors buy property for rental income or to hold long-term, maybe to one day hand it off to their kids—or just brag at cocktail parties about their portfolio. You’ll still pay taxes, but at much lower rates, and you’ll get juicy benefits like depreciation and 1031 exchanges.

💡 Fixing up your rental for better tenants? You’re investing. Renovating for a flip? You’re dealing (and probably watching too many house-flip shows).

🔁 Can You Be Both a Dealer and an Investor?

Yes, you can wear both hats—but not at the same time for the same property.

Example:

Peter Miller flips homes for a living but also owns an apartment complex he rents out. He sells the building after two years and reports it as an investment. The Tax Court agrees—it wasn’t dealer property.

🛡️ To avoid the "dealer taint":

• Use separate books, bank accounts, and even entities.

• Don’t mix "Miller Investments" with "Miller Developments."

• Have clean documentation, including your LLC purpose, tax filings, and property records.

• Don’t deduct rental expenses as business write-offs.

• Use agents when selling investments (no FSBO here!).

🔄 Property Status Can Change

Your property can evolve depending on your intent.

Example:

An LLC bought land to develop, but the market tanked. They stopped marketing, held it long-term, and sold later as an investment. The court agreed—intent matters more than the original plan.

On the flip side, if you bought a property for rental, then suddenly decided to flip it and hired a staging company and a drone videographer, you may have just crossed into dealer territory. 👀

✅ Quick Takeaways

1. Dealers = short-term resale

2. Investors = long-term income/appreciation

3. Dealer = higher taxes, fewer perks

4. Investor = lower taxes, depreciation & 1031 goodies

5. Classification is per-property, not per-person

💬 Need Help Figuring Out Where You Fall?

If you’re still not sure whether you're a dealer or investor- or worried that you might be walking into a tax trap—don't guess.

👉 Click here to book a call with Lisa Brugman EA & Associates
Let’s protect your profits and keep the IRS out of your business (literally).