Mommy Mentors Project
Short-term Real Estate Gains – Are they Capital or Ordinary?
by Teri Kaye, CPA
  Ron in Fort Lauderdale asked how you know whether the gain on sale of real estate is ordinary or capital. He bought and sold several properties in 2005, and he also bought and held some other properties. He wants to know if some can be treated as capital assets so he can offset capital losses with these gains.
This is a great question, because the answer is based on “facts and circumstances” and “intent”. In determining whether an asset is capital or ordinary, the IRS looks to the “intent” when the asset was acquired and the “facts and circumstances” thereafter.
If you are in the business of buying and selling real estate, then the

property is inventory and the sales are ordinary, unless you can show that a particular property was acquired for investment, not resale. The IRS would look for factors such as whether the property was similar to other inventory properties, whether you actively sought a buyer and what activities you performed on the property. If you are not in the business of buying and selling real estate, then the intention when you bought the property controls.

Whether you are in the business or not is also a “facts and circumstances” matter. The IRS considers such things as how much time you spend, whether you acquired special knowledge or experience, whether you advertise and have business cards, business phone, etc. and whether you conducted yourself in a business-like manner. If you act like a business person in regard to that activity, the presumption is that you are in the business.

If you bought multiple properties within a short period of time and fairly quickly tried to sell them, the IRS will likely treat the property as inventory so the gain will be ordinary. If you bought the property to hold as an investment, then you have capital asset (whether long or short depends on length of time owned).

Intent is the difference between investing and flipping. Intent is what you were thinking and planning when you made the purchase. You can buy property with the intention to hold it for 3 years and if someone offers you a phenomenal price and you sell, the property would still be a capital asset.

However, if you list the property for sale/rent as soon as you remodel it, then the presumption is that the property was purchased for resale and the gain will be ordinary.
For many people, property was acquired with the intention to flip but with no active real estate market currently, the property is now offered for or actually rented. If the rental is for a short period of time just until a sale can be obtained, the property can still be treated as a capital asset.

If you have had multiple real estate transactions and would like assistance in determining the proper treatment, please email me at

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