Any investor who sells more than one or two properties a year will run into the problem of being labeled “dealer status” by the IRS for tax purposes. This is extremely dangerous stuff. Tradesmen, like real estate agents, are considered self-employed and are subject to the 15.3% self-employment tax. Worse, a dealer can’t pay taxes in installments when he uses owner financing. All property tax must be paid in advance, even if full payment has not yet been received.

The most important factors the IRS seems to use in determining whether or not someone is a real estate broker are the frequency of property sales, the number of properties sold in a year, and whether there is continuity in the process to suggest that selling properties is the actual intent of the business. If the properties are held for more than a year before they are sold, this may also contradict the consideration of an investor’s activity as that of a “dealer”.

There are several ways to handle a significant number of transactions per year and still maintain the tax advantages of being an investor rather than a trader:

1. Invest property through a limited partnership, self-directed IRA, Coverdell Education Savings Account, or individual 401k plan. In a limited partnership, only the general manager will be considered a distributor. Trusts and various types of self-directed savings and retirement accounts are considered passive investments and these plans do not involve active participation in a business.

2. Form a joint venture agreement with an active investor or broker who will essentially create a “done for you” investment strategy for buying and selling wholesale. That joint venture partner may well be considered a “dealer,” but as long as you or your entity do not hold title, they will not be directly involved in any change of ownership activity.

3. Place each property in a separate LLC or trust and transfer the LLC or trust instead of the property within the entity.

4. At a minimum, be careful to separate your wholesale fix-and-switch business from other business activity, such as your “buy-and-hold” operations or any dealings that involve an installment sale.

Planning how to finance and maintain your property can be just as important in determining the success of your real estate investment as the actual selection of properties you decide to purchase. Having the brand with distributor status could cost you a lot of time in the long run. Make sure you’re dealing smart!