The old cliché that ignorance is bliss is demonstrably shown to be wrong when it comes to understanding and knowing tax law in the United States. Ignorance of the law is no excuse when it comes to buying and selling the property. If you are in the business, even part-time in investment property, you will do yourself and your business a huge service in protecting your assets by educating yourself in knowing the laws that apply. Ignorance here can be very costly.
If you are simply buying a house to live in it as your intention, then years later you sell it, the current rules are very simple. However, if you do this as a consistent practice, or you are buying and selling the property for income or profit, then the rules apply differently. Basically, a taxpayer here will fall into one of four categories:
- Bright-line Test
Each of these has different rules that apply. To determine which category you fall into has to do with your intentions when you purchased the property, your previous buying and selling habits in real estate, your relationship to other people in the business such as builders, contractors, or developers. For residential property, the IRS will use the bright-line test.
Do you also understand the difference between property investment versus property dealing? Is your profit considered income or capital gains? Even if you sold the property at a loss years after you purchased it, did the net income produced in reality offset the loss? Then there is the question of depreciation on a property and if you as an investor can in reality claim it.
If you are going to be doing property transactions, or if you wish to professionally help those file the proper taxes that are doing the property transactions, then you owe it to yourself to educate yourself on these various laws. You need to understand how they apply to various situations as there is no one size fits all here.
One of the best places to accomplish this for busy professionals is through online education forums. You owe it to yourself to check out Ashworth College’s tax preparation classes. Whether your career is a tax preparer, or even as a part-time or full-time investor in real estate, you need to know and understand tax law on property transactions.