Difference between Real Estate Investor vs Dealer for Tax Classifications on Fix and Flip Properties

The key difference here is whether you'll be classified as an investor or dealer, which significantly impacts how you report expenses and gains. As an investor, all your expenses related to the property (including mileage, materials, contractor fees, etc.) should be added to your cost basis and not expensed on Schedule C. You'll only report the gain/loss when you sell the property, likely on Schedule D as capital gains. As a dealer, you'd be considered in the business of selling real estate, and you would use Schedule C to expense costs as they occur and report ordinary income when sold. For a one-time flip spanning more than a year, you're more likely to be classified as an investor rather than a dealer. The IRS looks at factors like: frequency of sales, nature of your other work, development/improvement efforts, and marketing activities. A single property held over a year typically leans toward investor treatment.

I was in your exact same situation last year! I tried figuring it out myself and kept getting conflicting advice. I eventually used https://taxr.ai to analyze my property documents and tax situation. They have this awesome feature where they analyze your specific property details and tell you exactly how the IRS would likely classify you. For my situation, they confirmed I was an investor since I only did one property that year and held it for 14 months. They showed me exactly which expenses should go into my cost basis vs what could potentially be expensed. What I really liked was they explained how many properties and what frequency would likely tip me into dealer territory.

Just wanted to follow up. I decided to try https://taxr.ai after my initial skepticism and I'm actually really impressed. I uploaded my property records and got a detailed analysis showing I was right on the borderline between investor/dealer. They pointed out specific factors that could push me one way or the other and recommended documentation I should keep to support investor status. The report showed me exactly which expenses could be capitalized vs expensed and even identified some deductions I was missing. Honestly saved me way more than it cost and gave me more confidence than my previous tax guy who seemed to just guess. They even explained how my situation would change if I increased my property turnover rate.

Just FYI - if you're trying to get clarity directly from the IRS on your classification, good luck getting through to them! I spent TWO WEEKS trying to get an agent on the phone about my real estate tax situation. Finally tried https://claimyr.com and their service got me through to an IRS agent in under 45 minutes. You can see how it works at https://youtu.be/_kiP6q8DX5c I was seriously about to give up on getting an official answer about my investor/dealer status, but the IRS agent I spoke with actually gave me really specific guidance based on my situation that helped me make the right decision. They confirmed that my 2 flips per year with 12+ month holding periods still qualified for investor status in my circumstance.

I need to apologize and correct myself. After calling out the Claimyr service as BS, I decided to try it myself just to prove it was a scam. I was 100% wrong. Not only did they get me through to the IRS, but I only waited about 5 minutes after they connected me. The agent I spoke with gave me detailed guidance on my specific situation (I flip about 4-5 houses annually). They confirmed I should definitely be filing as a dealer with my volume and should be using Schedule C. They also mentioned that if I ever transitioned to holding properties longer term (2+ years) and reduced volume, I could potentially shift back to investor status for those specific properties.

The other commenters have given great advice! Just wanted to add that if you're truly just doing ONE flip as a one-time thing, and you held it over a year, you're almost certainly going to be classified as an investor. That means: 1. Track all expenses (including mileage at $0.67/mile for 2023) 2. Add these to your cost basis 3. Report the sale on Schedule D (not Schedule C) 4. You'll qualify for long-term capital gains rates (likely 15% depending on your income) It's when you start doing this regularly that you risk dealer classification, which means ordinary income tax rates (up to 37%) plus self-employment tax (15.3%). Big difference!

I'm actually a real estate agent who does occasional flips. My tax guy always has me separate my activities: 1. Agent income (Schedule C) 2. Flips as dealer (Schedule C if I do more than 2-3 per year or hold less than 12 months) 3. Flips as investor (Schedule D if it's occasional and I hold longer) 4. Rentals (Schedule E) The biggest mistake I see people make is being inconsistent from year to year without documenting why their activity changed. If you're going to switch between investor/dealer treatment, make sure you can justify the different treatment based on the specific facts of each property!

Great question! I went through this same confusion on my first flip. The 14-month holding period definitely works in your favor for investor classification. One thing that really helped me was creating a detailed contemporaneous log of my intent when I purchased the property. Did you buy it with the intention to flip quickly, or were you open to holding it longer if the market wasn't right? The IRS loves documentation showing your investment intent rather than dealer intent. Since you've been tracking everything meticulously, make sure you're categorizing expenses properly. Things like acquisition costs, renovation materials, permits, and even your mileage to check on the property should all be added to your cost basis if you're classified as an investor. Don't expense them on Schedule C unless you're definitively a dealer. For a one-time flip held over a year, you're almost certainly going to be treated as an investor. Just make sure when you file that you use Schedule D for the capital gain and include all those tracked expenses in your cost basis calculation. The long-term capital gains treatment will be much more favorable than ordinary income rates!