According to Tax Court Memo 2010-261, a husband and wife purchased real estate, refurbished it and reported the sale on Form 4797. They contended the homes were purchased for use as rentals; however, over the three-year period at issue, none of the homes were rented. The IRS determined that in actuality the couple was in the business of refurbishing real estate for resale and as such the tax payers were subject to self employment tax on ordinary income.
The determination of whether property is held primarily for sale to customers in the ordinary course of a trade or business requires several factors be taken into consideration according to the Tax Court including:
• Your purpose in acquiring the property.
• The purpose for which the property was subsequently held.
• Your everyday business and the relationship of income from the property to the total income.
• The frequency, continuity and substance of sales of property.
• The extent of developing and improving the property to increase the sales revenue.
• The extent to which the taxpayer used advertising, promotion or other activities to increase sales.
• The use of a business ofﬁce for the sale of property.
• The character and degree of supervision or control you exercised over any representative selling the property.
• The time and effort you habitually devoted to the sales.