Tax effects of buying real estate to sell for a profit

 

When you sell your home you do not usually have to pay tax on any profit from the sale because of the principal residence exemption. However, if you buy a property with the main intention of selling it, you will owe tax on any resulting gain (or profit).

The gain on the sale of real estate is the difference between what the property is sold for and its cost. In some situations this is considered business income; in other situations it is considered to be a capital gain.

How to report real estate sales

How you report depends on many factors. It is mandatory to report all property sold in 2016 or later to the Canada Revenue Agency (CRA), including your principal residence.

When selling a property other than your principal residence, you will be reporting as either business income or income from capital gains. If the property has decreased in value, you might also be reporting a business or capital loss. If you are not sure how to report, check out the examples below. You can also contact us or get some advice from a trusted source, such as a tax professional.

Examples

Buying to assign

With an assignment sale, the buyer of a property assigns the legal rights and obligations of their contract of purchase and sale to a secondary buyer. You must report any profit from an assignment sale as business income in the tax year in which you assigned your rights.

If the property is a new build (not yet occupied), the total amount received from the assignment sale, including any deposit paid, is subject to goods and services tax / harmonized sales tax (GST/HST). For more information, go to Assignment of a Purchase and Sale Agreement for a New House or Condominium Unit.

Buying to flip

In this scenario, a taxpayer buys a property, takes possession, and typically does some renovation. After the home is improved, the taxpayer sells the property and the gains (losses) form part of their income. The taxpayer may have lived in the property while making improvements. However, this does not entitle them to the principal residence exemption, because the intention was always to buy, improve and sell for profit. You must report any profit when buying to flip as business income.

Buying to build and sell

Buying to build and sell is like buying to flip, but typically involves a taxpayer who buys vacant land and builds a property, which is then sold, or buys a house which is then significantly renovated or is demolished and replaced with a new build. The taxpayer may have lived in the property while making improvements. However, this does not entitle them to the principal residence exemption, because the intention was always to buy, improve and sell for profit. You must report any profit when buying to build and sell as business income.

Buying to create rental income

In this scenario, a taxpayer buys a property to earn rental income. When the property is sold, you must report any profit as capital gain.

What if you do not report correctly

The real estate sector is one of many that the CRA addresses through risk-based audits. Audits related to real estate occur regularly across the country. The CRA has recently increased its compliance efforts in the real estate sector, particularly in areas where speculative activity has increased.

If your return is selected for audit, the factors that the CRA will consider in determining whether you correctly reported a real estate sale include:

  • the type of property sold
  • how long you owned it
  • your history of selling similar properties
  • whether you did any work on the property
  • why you sold the property
  • your intention in buying the property

Correcting your tax affairs

If you have failed to report some of your income to the CRA or otherwise not met your tax obligations, you may qualify for penalty relief through the Voluntary Disclosures Program. The CRA offers taxpayers the chance to come forward and correct or complete their information through this program.

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