QUESTION:
Hi David,
We are about to purchase a rental property with tenants already installed.
Purchase price is $50,000, rental income is $525.00 less property taxes. We
will be borrowing on a line of credit to purchase the property but plan to
sell in two years, probably for about 80,000. I know the interest on the
loan is deductible, plus expenses, but the interest rate is quite low. I am
concerned that it will not make enough of a savings on our taxes to make it
worthwhile adding the rent to our income, then deducting expenses, because
of the potential capital gain in a short time.
Are we required by law to report the rental income if we do not ever claim
expenses for the property? In other words, we do not set up a business tax
wise at all ( this is our only rental property and we have no plans to
aquire more).
Thanks very much for your help,
Jxxxxx
===================================
david ingram replies:
What you are describing is NOT a capital gain although I will admit that if
you put it on your tax return as a capital gain, the chances are slim that
the CRA will catch up to you and tax you at full rates.
You are describing a situation where you are buying this property to resell.
The rental income is incidental to the decision. You are expecting a
$30,000 profit in the future. Therefore, the venture is in the nature of
trade and taxed at straight income tax rates rather than capital gain rates
by virtue of your statement.
In the meantime, you ARE required to report the rent. It is up to you to
decide if you want to claim expenses against the rent on form T776.
For more insight into this Capital gains <versus> Straight Income debate, go
to www.centa.com click on [Tax Guide] and read the chapter on [Capital
Gains].
Remember that the act of buying and selling is straight income. There is an
election [39(6)] to treat Stock market trades as capital but no such
election exists for real estate. A long term rental that you decide to sell
is a capital gain. One that you buy with the intention of selling is
straight income although, again, I will admit that the CRA does not go after
it very much.
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