Ask John: Are you a dealer or an investor

The big single determining factor on the dealer versus investor question is your intent. Are you “in business” doing this (is it inventory)? Or are you building up your investment portfolio and passive income for retirement? The IRS rules and just about everything else you read or hear about on the question are there to help answer that question. Are you using some of the profits to live on or buy toys with? Did you remodel and sell shortly thereafter? Do you have another full time job?

There are thousands of court cases (really…. there are) where the IRS and the taxpayers have fought over this issue. And the results are all over the place. Buy and sell in 30 days? Dealer? The IRS has argued in court (winning sometimes and losing sometimes) that you are an investor, especially when you lose money on the deal. Investor status means you can usually only deduct $3,000 of your losses every year.

At the same time in another court with the same buy and sell in 30 days situation the IRS has argued (again sometimes winning and sometimes losing) that you are a dealer. Why? Because you made a profit this time.
The dealer versus investor question is big, and there are few truly “safe harbors”. Being sure to document the business reasons behind your transactions is sometimes as important as keeping track of the numbers.