New York Repo Homes – The Difference Between a Dealer and an Investor
The Clinton Tax Act has clarified the difference between investors who buy New York repo homes and sell them as dealers, and developers who buy and sub-divide real estate to sell it in lots. To determine the status of whether a person is an investor or dealer is not a simple matter. Each individual scenario has to be examined, however if you are regularly involved in the buying or development of property for improvement and resale you will more than likely be classified as a dealer and be taxed accordingly. However if you are more involved in buying real estate for the purpose of keeping it and renting it, you will be classified as an investor. Each has its own tax implications and it is worth your while to find out what these are before you start investing in New York repo homes.
New York repo homes are real estate which has been repossessed by the lender for failure on the part of the owner to meet their mortgage repayments. These are referred to as foreclosures in many circles, and at present the rates of these are so high, not only in New York, but in the entire US, that both investors and dealers are making a great deal of money. An investor stands to build long term wealth while, a dealer is in the business to make quick cash profits and is often referred to as being a speculator or property flipper. Both of these scenarios will influence your tax planning and many people who buy property to fix and resell will go to great lengths to avoid being classified as a dealer.
In many instances both dealers and investors will wear two hats, they isolate their investment business real estate assets as a separate entity, while developer activity is held in a completely separate partnership. But this is something you are going to have to take a look at with your tax lawyer. If you have been actively involved in buying New York repo homes, fixing them and reselling them for profits, you will invite IRS scrutiny when you make big profits. However investment property which is kept as rentals in the long term can actually serve your tax purposes well. The investor is allowed to claim depreciation on this real estate while in fact it is increasing in value and this decreases taxable income, without actually decreasing real income.
It is not easy to change from dealer status to investor status once you have started operations and the IRS knows what you are declaring for what. So better you start off on the right foot if you intend becoming involved in buying repo houses for profit or for investment purposes, or both. You may start out as a dealer and then change to an investor, but this is also going to invite scrutiny from the IRS, so make sure you have your ducks in a row for tax purposes on purchase of your very first property or even before.
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