When Are You Considered to Be In the Business of Buying and Selling Real Estate?
Lots of people like to dabble in real estate when markets are hot. The issue for tax filing purposes is whether you held the property for personal use, as a passive investment or whether you are in fact in the business of buying and selling real estate.
When real estate is held for investment purposes, any income it earns will be “income from property,” generally in the form of rent. Upon disposition of the property, any increase in value will usually be taxed as a capital gain. However, if you are continuously flipping your properties, it’s possible you’re in business.
· the taxpayer’s intention with respect to the real estate at the time of its purchase;
· geographical location and zoned use of the real estate acquired;
· evidence that the taxpayer’s intention changed after purchase of the real estate;
· the extent to which borrowed money was used to finance the real estate acquisition and the terms of the financing, if any, arranged;
· the existence of persons other than the taxpayer who share interests in the real estate;
· factors which motivated the sale of the real estate; and
The more closely a taxpayer’s business or occupation is related to real estate transactions, the more likely it is that any gain realized by the taxpayer from such a transaction will be considered to be business income (report on a business statement—100% income inclusion) rather than a capital gain (report on Schedule 3 as a capital gain—50% income inclusion).