flipping houses - straight income or capital gain
QUESTION: I bought a lot in 2005 and constructed a house and moved into it in 2006. I did not have a principle residence prior to this point as I was renting. I had an offer on my house and sold it last year and did make a profit.
At the same time I bought another piece of land that I was going to hang on to before building but since I sold this house I started building and have now moved in. And again this is my principal residence.
In the meantime, I again had someone driving around looking at houses and since I was there I let them look around. Well, they love it! And would really love to buy it.
My question for you is, I don't know much about the capital gains tax law and wasn't sure if I should take the risk on selling it. Would I have to pay capital gains, even though it is my principal residence? The market is so good right now that its hard to stay in one place when someone makes you a deal you can't refuse.
Any advice?
Regards,
Worried & Confused
---------------------------------------------------------------------------
david ingram replies:
Building or renovating a house and selling it ss generally considered a venture in the nature of trade whether you live in it while renovating or not.
Selling it because the price was right is a direct example of a venture in trade and taxable at full rates. It would be different and could be tax free if you moved in and could not stand the neighbourhood or they changed public transportation or announced they were not building a school and the house did not fit your circumstances but if yuo just sold it for a good price, you can expect that the CRA might look at it. If you do two in a couple of years, you can be sure that the CRA will look at it. Goto www.centa.com and read the capital gains section in the TAX Guide section in the top left hand box to see what the courts have done in the past and help youo figure out what to do.
The following two older answers will help you. If you sell this second house, you are putting yourself right in the line of fire from the CRA to go back and look at the first one.
In Canada, the purchase and sale of any piece of real estate with or without
renovations is considered a sale and subject to straight income tax unless:
1. It was bought for and clearly used as your personal residence and was
intended to be used for an indefinite period of time which is usually in the
five to ten year range.
2. It was bought as and used as a recreational property
3. It was bought for the purposes of earning long term rental income.
In the case number 1, there is no tax.
In the case of numbers 2 and 3, the sale is treated as a capital
gain and only fifty per cent of the profit is taxed at your regular tax rates.
Lots of / many (anyone caught) are taxed full tax rates when they
buy a house, move in, fix it up and sell it a year or two later and then
do another one.
Of course, most are NOT caught in these circumstances.
However, "any" flip is going to be straight income unless
the person can prove that they bought it to live in and then:
*
married a person with three children and it is not big enough (had to
sell and bought bigger)
* were transferred to another city (had to sell to buy in new city)
* lost their job, were injured, etc. and can no longer afford to move in. In
this case, they would have to show that they had the finances to have paid
for it when they bought it. (Not only can they not afford it but they have
moved into their parents' basement (boomeranged).
* Inherited a house from their parents and do not need it
any more. (are living in the new house)
You can read more by going to
www.centa.com - click on
tax guide in the top
left hand corner and then click on the "capital gain"
section.
david
This older q & A also gives an idea
My
daughter is closing on a presale Yaletown condominium this summer.
She is working until Christmas in Alberta. She returns to Vancouver
from Jan to May and if the job becomes a full time position, then she may
return to Alberta to live. At the time of presale, February 2004, we
thought that the suite would be assigned to her and that she would live in
the suite.
I was hoping that she could declare the suite as her permanent
residence since she is only renting in Alberta and the work is not
permanent. In May 2007, she could decide to keep or sell
the suite.
What does she need to do in order to qualify the suite as her
permanent residence?
-----------------------------------------
david ingram
replies:
There is no absolute answer because you can call a toad a frog
all day long but it is still a toad.
To be a principal residence and tax free for income tax purposes, the
property must have been bought by her to live in and she HAS TO move into
it. - No exceptions that I know of.
You can expect that the CRA will be looking at "every" quick resale
in EVERY downtown building.
In deciding if it is a capital gain or a flip, the CRA will be looking at
the suitability of the unit as a residence, the ability to pay for the unit
and past and even future performance.
In other words if she claimed this one as a principal
residence and then did it again a year later, the CRA would have every right
to go back and reclassify the first one.
At the same time I bought another piece of land that I was going to hang on to before building but since I sold this house I started building and have now moved in. And again this is my principal residence.
In the meantime, I again had someone driving around looking at houses and since I was there I let them look around. Well, they love it! And would really love to buy it.
My question for you is, I don't know much about the capital gains tax law and wasn't sure if I should take the risk on selling it. Would I have to pay capital gains, even though it is my principal residence? The market is so good right now that its hard to stay in one place when someone makes you a deal you can't refuse.
Any advice?
Regards,
Worried & Confused
---------------------------------------------------------------------------
david ingram replies:
Building or renovating a house and selling it ss generally considered a venture in the nature of trade whether you live in it while renovating or not.
Selling it because the price was right is a direct example of a venture in trade and taxable at full rates. It would be different and could be tax free if you moved in and could not stand the neighbourhood or they changed public transportation or announced they were not building a school and the house did not fit your circumstances but if yuo just sold it for a good price, you can expect that the CRA might look at it. If you do two in a couple of years, you can be sure that the CRA will look at it. Goto www.centa.com and read the capital gains section in the TAX Guide section in the top left hand box to see what the courts have done in the past and help youo figure out what to do.
The following two older answers will help you. If you sell this second house, you are putting yourself right in the line of fire from the CRA to go back and look at the first one.
In Canada, the purchase and sale of any piece of real estate with or without
renovations is considered a sale and subject to straight income tax unless:
1. It was bought for and clearly used as your personal residence and was
intended to be used for an indefinite period of time which is usually in the
five to ten year range.
2. It was bought as and used as a recreational property
3. It was bought for the purposes of earning long term rental income.
In the case number 1, there is no tax.
In the case of numbers 2 and 3, the sale is treated as a capital
gain and only fifty per cent of the profit is taxed at your regular tax rates.
Lots of / many (anyone caught) are taxed full tax rates when they
buy a house, move in, fix it up and sell it a year or two later and then
do another one.
Of course, most are NOT caught in these circumstances.
However, "any" flip is going to be straight income unless
the person can prove that they bought it to live in and then:
*
married a person with three children and it is not big enough (had to
sell and bought bigger)
* were transferred to another city (had to sell to buy in new city)
* lost their job, were injured, etc. and can no longer afford to move in. In
this case, they would have to show that they had the finances to have paid
for it when they bought it. (Not only can they not afford it but they have
moved into their parents' basement (boomeranged).
* Inherited a house from their parents and do not need it
any more. (are living in the new house)
You can read more by going to
www.centa.com - click on
tax guide in the top
left hand corner and then click on the "capital gain"
section.
david
This older q & A also gives an idea
My
daughter is closing on a presale Yaletown condominium this summer.
She is working until Christmas in Alberta. She returns to Vancouver
from Jan to May and if the job becomes a full time position, then she may
return to Alberta to live. At the time of presale, February 2004, we
thought that the suite would be assigned to her and that she would live in
the suite.
I was hoping that she could declare the suite as her permanent
residence since she is only renting in Alberta and the work is not
permanent. In May 2007, she could decide to keep or sell
the suite.
What does she need to do in order to qualify the suite as her
permanent residence?
-----------------------------------------
david ingram
replies:
There is no absolute answer because you can call a toad a frog
all day long but it is still a toad.
To be a principal residence and tax free for income tax purposes, the
property must have been bought by her to live in and she HAS TO move into
it. - No exceptions that I know of.
You can expect that the CRA will be looking at "every" quick resale
in EVERY downtown building.
In deciding if it is a capital gain or a flip, the CRA will be looking at
the suitability of the unit as a residence, the ability to pay for the unit
and past and even future performance.
In other words if she claimed this one as a principal
residence and then did it again a year later, the CRA would have every right
to go back and reclassify the first one.
What's Related