Investor or Flipper

[ILLMAS]

I am trying to figure if this person would be an investor or flipper that would be subject to SE tax. 

Facts:

1.  Person is a real estate agent and buys houses, contracts people to do all the work and then sells them.

2.  From the proceeds, another house is bought and so on.

3.  Sometimes not all the proceeds are reinvested in a new house.

4.  On occasions, another person invests 50% on the purchase of the a new house and improvements, proceeds are distributed 50/50 when the house sells.  TP only reports their share on 1120S.

5.  Buys 3-5 houses a years.

6.  Houses are bought through an LLC that files an 1120S, owner gets a K-1.

7.  TP does not draw a salary, takes a distribution occasionally.

8.  In the prior tax return, properties were reported as inventory

7.  TP paid ordinary tax on the proceeds from the K-1.

Questions

a.  Should the sales be reported as capital gains?

b. Or as ordinary income since the properties are considered inventory?

c. Ordinary income plus SE tax?

Concerns

i.  If this person was an investor no doubt they would be paying capital gains, or if they were reporting it on a Sch C then they would be subject to SE tax.  However, by putting it a on a 1120S it seems they can avoid paying SE tax, but if it's determine this person is a flipper, can one make the K-1's income subject to SE tax?

Thanks

 

 

 

[michaelmars]

sounds like a flipper and therefor the income is ordinary. Property is inventory as are the improvements

 

[RitaB]

3 hours ago, ILLMAS said:

...Houses are bought through an LLC that files an 1120S, owner gets a K-1.

7.  TP does not draw a salary, takes a distribution occasionally.

... If this person was an investor no doubt they would be paying capital gains, or if they were reporting it on a Sch C then they would be subject to SE tax.  However, by putting it a on a 1120S it seems they can avoid paying SE tax, but if it's determine this person is a flipper, can one make the K-1's income subject to SE tax?

I agree he's flipping properties.  If I understand, and "owner" and "TP" are one and the same, and he's also a shareholder, the S-Corp has to pay him reasonable wages for what he's doing.  If he's the only shareholder, I would think that would be all or most of the profits.  I realize that S-Corps are commonly used to avoid SE tax, and many are more aggressive than me about avoiding SE tax, but my Social Security checks will be bigger than theirs.

[Abby Normal]

Monies reinvested in the next project are not available for wages. Also, he had an initial capital investment and is due a return on that investment. I'd take some % of distributions as wages, but not all.

[Roberts]

In my opinion, 3-5 per year is unavoidably going to be categorized as earned income by the IRS.

1-2 per year can arguably by an investment program but there is no possible way the IRS will allow 3-5. Frequency of the flip is very important in determining the characteristic of the sale.