Is a Property Fix-up and Sale (Flip) an Investment or a Dealer Sale?
First, does it even matter? Yes, it does. If the sale is classified as an investment sale you pay only income taxes on the gain. If you held the property for over one year you would get favorable long term capital gains treatment.
On the other hand, if the sale is classified as a sale of dealer property you would pay tax at your top ordinary tax rate and self-employment taxes.
While there is no bright line test to determine investment vs. dealer property, we do know what circumstances will classify the property clearly as an investment property and what circumstances will classify a property clearly as a dealer property.
1. The higher the frequency of your property sales increases the chance that the IRS will classify your sales as dealer sales.
2. If you hold the property for over a year, you strengthen your case for investment sale treatment and you get the lower long-term capital gain tax rates.
3. Renting the property before selling it also strengthens your case for investment sale treatment.
4. The more time you spend on renovations increases the likelihood of the IRS classifying the sale as a dealer sale.
5. There is no definitive test between investment and dealer property so align as many facts as possible to support investment status.