The IRS makes a distinction between an investor and a dealer. An investor holds property for a period of time (usually longer than a year) and a dealer develops property or purchases property with the intent to make improvements and sell. An investor receives 1031 Exchange benefits and a dealer does not.
Many investors who buy and sell real estate want to know when they are crossing the line from being an investor to becoming a dealer. Dealer status is one of the largest “gray areas” of Section 1031. A dealer may have properties that are held for resale, but is also entitled to be an investor like anyone else.
The following nine points can help you determine if you fall into the dealer category:
- The purpose for which the property was acquired.
- The purpose for which the property was subsequently held.
- The extent of improvements made.
- The frequency, number and continuity of sales.
- The extent and nature of transaction in the property.
- The general business activities of the taxpayer.
- The extent of advertising and promotion of the property for sale.
- Whether the property was listed with a real estate broker or other outlets.
- The purpose for which the property was held at the time of sale, as opposed to the time of acquisition.
Again, properties that fall under dealer status do not qualify for a 1031 Exchange.
Section 1031 does not contain a minimum hold period other than when exchanging between related parties (then the property must be held for 2 years). Ultimately, time is much less important than intent. As these nine points show, a pattern will form. It is possible for an investor to have one or two of the above “strikes” against them and still qualify. Most “dealers” will have a problem with a majority of the points. Ultimately, whether a property qualifies is up to the Exchangor and the Exchangor’s tax counsel.