I acquired tax liens in my state then it owners dont pay I get the tax deed to the property. After I clean the property via a quiet title action I typically sell the property via 1031. I have a W2 job and do tax lien investing on the side. I’m I a Real Estate Dealer or Investor in this case? My CPA is suggesting I’m a dealer status which would void my 1031 and have to pay ordinary income tax.
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If you’re buying tax liens, getting the deed, cleaning up the title, and then selling with a 1031 exchange, that sounds more like an investor. Investors hold properties for appreciation and long-term gain, and they can take advantage of 1031 exchanges and capital gains tax treatment.
But if you’re turning these properties over quickly and doing this frequently, your CPA might have a point. Dealers are viewed as being in the business of selling real estate, which means their profits are taxed as ordinary income, they can’t use 1031 exchanges, and they may even owe self-employment tax.
If you want to avoid being classified as a dealer, you might consider holding some properties for longer, renting a few before selling, or keeping separate entities for different types of transactions. The more you can document your intent as an investor rather than a flipper, the stronger your case will be.
It really comes down to your volume of sales and how quickly you’re turning properties over. If this is more of a long-term investment play for you, you might want to push back on the dealer classification.
If you want more insight, I’ve got a whole video and blog post that gets pretty deep into this subject.
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Thank you, Seth. We really need to learn how to (legally) avoid paying taxes we don’t owe.
I will watch your video and read its blog.
Hello Hunter. I have purchased a few tax lien certificates (for land) from county tax sales in Arizona over the past three years. I have turned two of them into deeds so I could sell them.
I like your usage of the 1031 Exchange and could use this technique when selling my properties.
With our current market, have you had much luck finding new property to purchase right away (at the right price) under the 1031 timeframe?
Which state(s) are you investing in with the 1031?
Thank you in advance for your response.
(I am a part-time investor, not a dealer.)
So far I have only acquired land via tax liens in the state on Montana. For my particular lots once I purchase tax liens, acquire tax deed and clean the title im all in for around 5k. This usually takes me about one year from beginning to end. I sold about 9 lots last year for around $40k. With such a low cost basis i didnt want to take the tax hit and thought a 1031 would be best. I 1031 into two residential lots (in city limits) in MT to build rentals hopefully.
To avoid the IRS thinking I’m a dealer as I scale this business and acquire/sell more tax lien properties, Im thinking about utilizing the IRS Code 26 U.S. Code § 453, Scroll down to sub-section (l)(2)(B)(ii)(II) (II) any residential lot, but only if the taxpayer (or any related person) is not to make any improvements with respect to such lot.(Found this IRS code in another retipster blog 
). The challenge im having is trying to convince my CPA that this is a viable solution to for future sold properties.
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I found the IRS code showed the info you referenced under the heading: " (L) Dealer dispositions. --For purposes of subsection (b)(2)(A)"
I searched on: Codes.FindLaw dot com
Has anyone used the online platform, Parcel Fair? I subscribe to their $49/month service when doing my research before buying tax liens…It has everything I need in one place with maps, county info, etc. I highly recommend it. They’re also on youtube.