To Deal Or Not To Deal...What's The Big Deal?
What are the pitfalls of taking the position of a "dealer" in a REI transaction? I recently attended a Real Estate Investor's meeting, during which there was an excellent speaker on the subject of Real Estate Tax Law. One piece of advice he gave, was to never, never, never take the position of a "dealer" in a transaction, or you would be tagged by the IRS and audited. How does one get around this? Did he mean that you should never put a contract on a house and then flip it to another investor? If you do, when it comes time to do your taxes at the end of the year, how do you file? In other words, what do you call yourself, so as not to be tagged by IRS as a "dealer"? 
(State of Maryland).
Call yourself an investor.
I don't know the exact numbers, however, it turns out to be a bad deal for you on the properties that you own that are not "Dealer" properties. My understanding is that flips could correctly be clasified as dealer properrties. Properties that you intend to hold on to for a while for cash flow and/or appreciation shouldn't. The problem is that if YOU are classified as a "Dealer" by the IRS, you lose some of the very things that make long term investing attractive, and all of your property is subject to dealer status.
I may be wrong here, but I'll give this a shot. Anyone that knows, feel free to jump in here at any time.
Any rent collected on rental properties is now clasified as income and as such is subject to self employment tax etc., You lose the ability to write off appreciation on income producing property, and the interest on your personal residence. If you carry back financing (i.e. You are the note holder) on a property, you have to pay taxes on the full amount of the note in the year that you take back the note, regardless of how much you collected. Overall, not a pretty thing.
It's been suggested to me that if my goals are to invest in a mix of "Quick turn" investments, and properties that I plan on keeping awhile, that I should use an LLC or Coproration to purchase my quick turn properties, and a separate LLC or Corporation to purchase the keepers. This establishes separate tax entities. The properties then can be taxed at the appropriate rate based on the investment objectives for each.
I hope I'm not way off here. I don't have the legal expertise or tax experience to offer any authoritative advice, but I hope you find this helpful. Maybe some of the real experts on this site will help out.
Good Luck,
Jeff
Thank you Jeff. I understand a bit better now. I will take your advice about forming an LLC. It's sound advice. The best to you.