Discussion:Another short-term investment gain question

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Discussion Forum Index --> Tax Questions --> Another short-term investment gain question

Estock (talk|edits) said:

19 May 2006

Client came in today who purchased 5 properties last year, sold two of them, and put his primary up for rent. He has tracked all his business expenses, as well as mortgage interest, etc. He has only been able to rent one of the properties (the one converted from primary). So, my questions are:

-The properties which he has held on to, should I report them on Sch E (obviously, the one which he is receiving rent on should be there, I think)? -The properties which he purchased and sold, should I only report the gain on a Sch C, then deduct all his expenses there?

I am just confused as to the rules of what can be counted as SE income - I would think that the sales of property were subject to cap gains tax, but for some reason I recall that a real estate professional can claim the income on a Sch C and write off all related real estate expenses - and if so, does this include mortgage interest and taxes and all things deductible on a Sch E.

I am so confuseddddd.....

Solomon (talk\|edits) said:	20 May 2006
Real Estate Professional

Estock (talk|edits) said:

22 May 2006

Solomon - I had previously looked at this link and even Publication 925 mentioned within this link and unfortunately neither address my question above. Basically the link is a discussion about the definition of a real estate professional.

I have a client base of 700+ and I would say that probably 20% of them own investment real estate - I live in a city where the common housing is multi-residential and most of these clients own 2 or 3-flats.

In the situation above, I would normally file Sch E for all of the properties. However, there is such a buzz about how this income from what to me looks like a short-term sale of an investment property may be treated as Sch C income. Why someone would want to subject this income to SE tax is beyond me, but in any respect, this particular client mentioned above has brought to the table a list of business expenses that are very simular to a real estate agent's expenses. So, instead of writing these expenses off on the Sch E, I am interested in anyone's opinions about claiming the short-term sale as Sch C income and how to do that, and if anyone thinks that is correct to do.

Any thoughts out there? JR1, how about you?

Dennis (talk|edits) said:

22 May 2006

Unfortunately, the Real Estate Dealer decision is not one you can get away from. Property purchased would become inventory and all sales ordinary income regardless of holding period. Even rental income becomes subject to SE tax.

REAL ESTATE DEALERS - If you are a real estate dealer, rent received in the course of your trade or business is included in self-employment income. You are a real estate dealer if you are engaged in the business of selling real estate to customers with the purpose of making a profit from those sales. IRS Tax Trails