Property that is “held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business” (commonly referred to as dealer property) is excluded from the definition of “capital asset.” Therefore, the sale of this property is taxed at ordinary income rates, as opposed to the lower capital gains rates that apply to the sale of a capital asset. While the classic example is a developer selling individual condominium units, this provision also applies in certain less obvious situations. A recent case held that a taxpayer had ordinary income in a circumstance that some may find surprising—the sale of a single parcel of undeveloped real estate.
Background
Long-term capital gain (i.e., gain from the sale or exchange of a “capital asset” held for more than one year) is taxed at lower federal income tax rates than ordinary income. Currently, long-term capital gain is subject to a maximum federal income tax rate of 20 percent, where ordinary income is subject to a maximum federal income tax rate of 39.6 percent.
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