Dealer Property (Held Primarily for Sale)

The phrase appears in four places in the Code, and the Supreme Court defined its key word.

Section 1221(a)(1) excludes from capital assets property held primarily for sale to customers in the ordinary course of business, and section 1231(b)(1)(B) excludes it from section 1231 treatment. Section 1031(a)(2) bars it from exchanges, and section 453(b)(2)(A) and (l) deny installment reporting on dealer dispositions of real property.

In Malat v. Riddell, 383 U.S. 569 (1966), the Supreme Court rejected the argument that a "substantial" sale purpose is enough and held that "primarily" means "of first importance" or "principally."

Courts weigh seven factors, and the frequency and substantiality of sales leads.

The Fifth Circuit in Bramblett v. Commissioner, 960 F.2d 526 (1992), listed them: the purpose of acquisition and length of ownership; the extent of efforts to sell; the number, extent, continuity and substantiality of sales; subdividing, developing and advertising; use of a business office for sales; supervision of anyone selling for the taxpayer; and the time devoted to sales. Citing its en banc decision in Biedenharn Realty Co. v. United States, 526 F.2d 409 (1976), it called frequency and substantiality of sales the most important factor.

Applying them, the court found that a partnership with five land sales over three years, one of them the large sale at issue, was not in the business of selling land. Few, isolated sales favor investment; numerous sales of subdivided property over a long period point the other way.

The rate gap is what makes the label expensive. Dealer profit is taxed at ordinary rates, which for 2026 reach 37% above $768,700 of joint taxable income under Rev. Proc. 2025-32, instead of the 0%, 15% and 20% capital gain rates. Because the property is neither a capital asset nor section 1231 property, a loss on it is ordinary as well.

Worked example and where it bites: the same owner can hold both kinds of property.

Hypothetical: you build three spec houses and sell them within a year for a $300,000 combined profit, while also owning a fourplex you have rented for eight years. The houses look like inventory, so the profit is likely ordinary income and cannot be deferred in an exchange. The fourplex, held for rent, can still be exchanged. Run your own facts past your CPA.

Status is judged property by property, but a pattern of sales colors everything. Intent can also change: a rental converted into a subdivision project may become dealer property. See can you 1031 a fix and flip, developer sale options, and the opposite test, held for productive use or investment.