Most clients assume the sale of land is a capital asset which will get preferential capital gain treatment. While many sales will qualify, some sales by dealers will not because it is their trade or business. In addition, an investor (not a dealer) can benefit from installment sale reporting. The question is how do you determine if you are a dealer or an investor?
To determine if you are a dealer three questions must be answered.
1. What is the taxpayer’s trade or business?
2. Is the land being held for that business?
3. Were the sales in the ordinary course of that business?
In determining if property sold is in the ordinary course of business the facts and circumstances to consider are as follows:
a. Owner’s intent
b. Extent of improvements and advertising to increase sales
c. Number, frequency, and substantiality of sales (this generally is the most important factor)
d. Duration of ownership
e. Continuity of activity related to sales over a period of time
f. Extent and nature of the efforts to sell the property
g. Extent of subdividing and development to increase sales
h. Use of a business office for the sale of the property
i. Character and degree of supervision or control over representatives selling the property
No one factor or combination of factors is determinate in land sales matters. Planning for these transactions is critical as certain strategies can help to avoid dealer status. If you would like assistance structuring your real estate sales please feel free to contact me.
Written by Howard Flitt
Check back again for a future post – Relief Provisions for the Sale of Subdivided Property