Whether you buy and sell homes as a business or hold real estate for rental purposes, knowing the tax consequences can save you from costly surprises.
Business Income or Capital Gains
If you are in the business of buying a home, making some changes and then reselling it for a profit then all of your gains are taxable and losses are fully deductible.
On the other hand, if you purchase real estate to generate income from rents, the subsequent sale of the property would be considered capital gains or capital losses.
The difference between the two may seem like semantics, but business gains are 100% taxable whereas only 1/2 of a capital gain is taxable.
Now there aren’t any hard and fast rules to determine whether a transaction is business or capital. If it comes down to it, the CRA would review the transactions over a period of time to evaluate the frequency and your intent. If it appears you are buying and selling homes to generate profits, then they will likely consider it business income. If you have had to move and sell several times, it would be capital.
Don’t assume that a single buy and sell or “flip” could be capital. The CRA may disagree so it is wise to get sound tax advice.
Principal Residence Exemption
If the investment property is also considered your principal residence, then the principal residence exemption may be used to reduce or eliminate the capital gain.
Typically, if you have not claimed capital cost allowance (CCA) on your rental income or have had a conversion to or from a rental property, then there would like be no capital gain. However, if there is a taxable capital gain, the exemption may be claimed using form T2091 with your tax return for the year the property is sold.
Sound Tax Advice
If you are considering flipping a property or purchasing an income property, it pays to have a professional on your side.
As your accountants and tax advisors we can help you navigate the surprisingly complex world of real estate and help you pay less tax.
Call us today at (289) 288-1206 or email to make an appointment to have us assist you with your investment.