31.2 Sales of Subdivided Land—Dealer or Investor?

An investor faces a degree of uncertainty in determining the tax treatment of sales of subdivided realty. In some situations, investor status may be preferred, and in others, dealer status.

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image Planning Reminder
Installment Sales
The distinction between an investor and dealer is significant if land is sold on the installment basis. Investor status is preferable if you want to elect the installment method. Dealers may not elect installment sale treatment (5.21).
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Capital gain on sale.

Investor status allows capital gain treatment. Capital losses may offset the gains. For capital gain, an investor generally has to show that his or her activities were not those of a dealer but were steps taken in a liquidation of the investment. To convince an IRS agent or a court of investment activity, this type of evidence may present a favorable argument for capital gain treatment:

  • The property was bought as an investment, to build a residence, or received as a gift or inheritance.
  • No substantial improvements were added to the tract.
  • The property was subdivided to liquidate the investment.
  • Sales came through unsolicited offers. There was no advertising or agents.
  • Sales were infrequent.
  • There were no previous activities as a real estate dealer.
  • The seller was in a business unrelated to real estate.
  • The property ...

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