- quote -

First, never, ever put real estate into a corporation, even
an S corporation. Use the LLC instead. Whether you are a
developer depends on facts and circumstances. If your
intention is to hold the properties as investments and they
don't pan out I think a good case could be made for
investment status. Short-term rentals, however, are a
business subject to self-employment tax when profitable, not
a rental activity. Losses in such activities are not
eligible for the $25,000 deduction for active participation
rental real estate.

Demonstrate that you are soliciting rentals whether or not
they make money on a year-to-year basis. In real estate the
big bang is often in the ultimate sale, not in current
operations. the longer you operate as a rental activity, the
more the assets look like investments. To the extent of
accumulated depreciation, the gain would be taxed at 25%
instead of 15%, but if the passive activity limits have been
applied to losses in intervening years, that isn't such a
bad deal, since the accumulated (ordinary) losses are offset
by capital gains.

--
Thomas E Healy, CPA, PC
1650 38th St., Ste 202W
Boulder, CO 80301
Please send email to: tom[at]tomhealycpa.com, since I block all email at my
newsgroup address.
phone (303) 443-1804
fax (720) 489-3772

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

My business partner and I have a small healthcare company.
We are in the process of purchasing a couple of lake lots
that we plan to build houses on. It is our intention to
hold on to the property as a long term investment if we can
rent them out as short term rentals to pay the expenses. If
the rental business doesn't cover most of the expenses, we
will sell the homes outright. The hope would be to at least
hold them for a full year.

From reading on the web I see that there is a fine line
between being an investor of property and a dealer of
property. The former is subject to capital gains tax, the
latter to ordinary income. We are trying to figure out how
to hold this property to make sure that, if the rental
business doesn't work out, that we can sell them without
being classified as "developers". If things work out well
with the property, we would certainly consider more to
either rent out or sell.

Originally we were going to set up an LLC to hold the
properties in and keep them separate from our healthcare
business - an S corp. After reading about the concerns of
becoming a "developer", the thought was that maybe we should
hold the properties in our healthcare company so it doesn't
appear that that is all we do. In other words, let's say
that the rentals don't work out and we have to sell them in
a year. Wouldn't it be better off to have that revenue
mixed in with healthcare revenue?

Then again, let's say that it goes well and we want to do
more of buying, building and selling/renting. In that case,
what do we need to do to process these acquisitions as
investments and not inventory?

We very much appreciate any advice that you can provide as
to how to hold the property (in our existing business, in a
new LLC or S-corp business, or hold them individually -
maybe one for him and one for me) and any other issues such
as liability and other things that we should be factoring
in.

Thank you.
Barry Johnson

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->