Selling owner built house intended to be lived in --
My question is: Canadian-specific
QUESTION: We purchased a lot that we wanted to build our house on and live in (B). We put our current house (A) - primary residence on the market but can not sell it at this point. We can't keep both houses so if the B finishes and we can not sell A then we will have to sell B (not that we want to). Would there be a capital gains on that house or what are the tax ramifications for that house.
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david ingram replies:
As described, house B, the one you built, will be subject to Capital
Gains tax. You also have to be prepared fro the CRA wanting to tax
you as a builder if you just build and sell. This will be especially
true if you are a builder, carpenter, developer or Realtor who
regularly works with the building or renovating or selling of real
estate
If questioned, or audited, you will have to prove beyond a doubt that
you really intended to move into it.
Builder Harjit Atwal found this out when he built five houses at the
same time. Four houses were the same, with the fifth house quite
different. He said he had built it for himself and which he moved into
and lived in as a residence. He then sold after devastating events in
his life. The judge ruled he was taxable at full rates on the house he
moved into even though he and his wife (who worked for the CRA by the
way) testified to the fact that they had built it for themselves.
In other words, The building and selling of a house is what builders do
as a business and is taxable at straight rates even if the first one.
In addition, if they want to claim it as a personal residence, they
better live in it for a long time, not just a couple of years.
You can read more about the difference between capital gains, straight
income and tax free by going to www.centa.com. Go the TAX GUIDE in the
top left hand box and then click on capital gains.
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This older question will help as well. I think it is funny that the
one person sent me back a link to read that a Realtor had given him.
Of course, it was my own commentary.
My question is: Canadian-specific
QUESTION: Hi,
If we buy a fixer-upper to renovate and flip without renting it out
what are the allowable expenses for deductions?
Thanks
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david ingram replies:
In general anything you spend to do
the fixing is a deduction from the final sale profit. This would
include but is not limited to:
materials, subcontractors, legal,
accounting, real estate commissions, surveyors, appraisals, interest on
the mortgage, interest on a building loan, interest on material loans
(maybe because you used a credit card to buy), truck expenses to get
supplies and transport tools, advertising, utilities, photography,
landscaping, trash removal, dumping fees, building permits, architects
fees, engineering fees, home inspection fees, insurance, helpers, etc.
Remember that any profit is taxable at
straight income rates on line 135. Flipping or renovating does NOT
create capital gains tax. The following older Questions will explain
that a bit.
______________________________________________________________________
DAVID
A "friend" who is a BC Realtor and has the
flipping question presented to her
from time to time recently attended a seminar that was related to this
subject. As a result she was able to provide me with some interesting
thoughts to ponder concerning "intent" and "professional background"
when it comes to "flipping houses" and tax in Canada. You may possibly
be looked at as a Developer with all the subsequent implications.
Read the full article at <http://tax.centa.com/comment.php?mode=view&cid=8>
(Note that this link he sent was my own commentary.)
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david ingram replies:
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?
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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.
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