teryTrader or investor? If you tend to buy and sell a number of stocks continuously and hold them briefly you are probably a “trader” or “dealer” instead of an investor. Unlike investors, a trader doesn’t qualify for the long-term capital gain tax rate which can be half or less of your regular tax rate.
Likewise, trader” or “dealer” status can rob a real estate purchaser of capital gains treatment. There is no magic formula to avoid dealer status. To determine dealer status, the courts look at all the circumstances, including:
- What is the taxpayer’s business?
- Did the taxpayer buy the property to sell it?
- Were the taxpayer’s sales “ordinary” in the course of that business?
- How many improvements were made.
- How long was the property held?
- Number, frequency, and substantiality of sales
- Efforts to sell the property.
Real estate horror story. Let me demonstrate how the hidden tax traps laid by Congress can combine to create a horror story for clients.
I represent a couple with joint incomes of roughly $250,000. They bought a Florida property for $200,000 in 1995 and rented it since then. Accumulated depreciation totaled $120,000. The property sold for $400,000 in 2015. Because of the depreciation, the gain was about $330,000, boosting their adjusted gross income to over $550,000. What would you guess was the tax effect?
They lost all of their exemptions and lost $7,000 of itemized deductions. They had an alternative minimum tax of $5,800 . They incurred a 3.8% surcharge on net investment income equal to $11,500. Their total tax was over $130,000, $74,000 higher than it would have been without the sale.
My advice: Consider an installment sale, splitting the gain into two or more years.
My advice: Year-end planning of all kinds would have been desirable, prepaying expenses, etc.