The tax consequences from the sale of real estate are vastly different depending on whether or not the real estate is considered to be “held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business” (commonly referred to as “dealer property”). Unfortunately, there are many circumstances where it is unclear whether real estate constitutes dealer property. One difficult question that sometimes arises is when a change in circumstances causes real estate that initially was dealer property to no longer be classified as such. In a recent case, a taxpayer was unsuccessful in its argument that a change in its intentions caused dealer property to be converted into property held for investment.

Background

Long term capital gain (i.e., gain from the sale or exchange of a capital asset held for more than one year) is currently subject to a maximum federal income tax rate of 20 percent for individuals, compared to the 39.6 percent rate for ordinary income. The definition of “capital asset” excludes property that is “held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business” (“dealer property”).

While a developer selling residential condominium units is a classic example of dealer property, real estate can constitute dealer property under much less obvious circumstances. Courts determine whether property is dealer property based on a facts and circumstances test, which generally includes the following criteria (among others):