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Wholesaling can be a lucrative cash-profit business. But can wholesaling make you a dealer? That all depends on a number of factors, but first some background. Wholesaling is rapidly re-selling a property “as is” with little or no fix-up. Frequently the investor never goes to settlement and will just assign (or flip) the agreement of sale to their buyer for a quick profit.

Being tagged as a dealer could be a financial disaster because, unlike an investor, you are subject to the highest ordinary income tax rates, plus Social Security taxes, other employment taxes and possibly alternative minimum taxes. Thus, 50% or more of your hard earned profits could be drained by taxes. Moreover, dealer profits (cash or paper) are immediately taxed in full and cannot be tax-deferred in any way including not being able to use a 1031 exchange, installment sale reporting, a self-directed IRA, certain trusts or any other tax deferral strategy.

Being classified as a dealer could wipe you out! Its like being condemned to purgatory! On the other hand, if you demonstrate status as an investor you can be saved and avoid these expensive pitfalls of being a dealer.

First off, just because you start to flip properties does not mean you are a dealer. Based on numerous tax courts cases (including a Supreme Court Case); actual IRS audits; and my extensive research; with planning, even a very large number of flips (in one year) could avoid costly dealer status.

Altogether, there are over 30 strategies to avoid the penalty of a dealer. My experience indicates that one of the best strategies is investment intent. That is, demonstrate that the primary purpose of the quick sale profits is for investment purposes and not sales speculation. For example, the primary purpose (or purposes) of the quick sale profits can be for a number of investment necessities, such as down payment funds to acquire long-term investment keepers, or working capital for property investment operations including preventive maintenance.

With this basic, tax follows economics as opposed to sales speculation with tax avoidance motivation. That is economics first! Accordingly, as employed here, these flips are non-dealer, investment transactions with solid economic foundation. This is a very powerful defense against any IRS attacks. Consequently, there are numerous cases and scenarios, some of which I have had first hand experience with, where even a numerous number of sales in one year did not cause dealer status.

As of this writing, there has never been an issue of civil or criminal fraud with the issuance of investor over dealer classification. With the right planning and documentation, entrepreneurs have literally sold hundreds of units in a short time, claiming not to be a dealer, and have even won their cases when challenged.

The issue here is a very arbitrary question of fact and not of law. With the burden of proof shifts to the IRS when considering cases of fraud, the difficult and almost impossible task is rarely tried. Thus, real estate entrepreneurs have everything to gain and little (if any) to lose. They should do so by planning in advance with dealer-avoidance strategies (especially investment intent), avoiding inept advisors, and go for it!

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