Real estate, investment (WW2016_4)

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.

For a complete personal analysis of your taxes and a taste of Tax Mastery, E-mail: wislaughlin@gmail.com

About Wis Laughlin

I help clients with tax preparation and IRS representation, estate planning, and complex contracts, including LLC's. As a former IRS tax attorney in their National Office. Law.com picked Wis in 2017 and several prior years as one of the Top Tax and Estate Lawyers in Tennessee. I am your advocate, not your accountant. I don't tell you what you can't do. I show you how to do it.
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