Question on Real Estate Inventory viz capital gain

[nubiwan]

I understand that if I build a new home with the sole purpose of reselling it then CRA will determine that I am in the business of building and selling homes and treat my profit as business income.



My question is this. If I use some of the aforementioned profit to go and purchase a piece of land, or perhaps use as a downpayment on a house (in the same calandar year), does that new land or property get treated as business inventory, as the home I just sold was?



I guess you can all see what I am getting at. I don't mind my profit being treated as business income, but if I go and buy more inventory, then I see no reason it cannot be deducted from my 'income'.



Not sure this forum has anyone equippe dto answer, but surely someone has asked or come across this issue before.



Cheers

Tony

 

[Thomas Beyer]

In general, rental properties held long term for rental income are not treated as inventory, and as such once you sell, you pay less taxes, namely capital gains.



All other, say land development or construction or flipping is treated as business income (aka "inventory")

 

[nubiwan]

Thanks Thomas.



Does this mean my 'income' is treated as my profit less any land acquisition or delinquent properties I buy to renovate?



Tony

 

[MarkHealy]

Tony

You might restate that



Your Profit is your Income (sale of property) less land and building costs/renovations (cost of goods) as well expenses of running the business



I'm not sure how you could have a "delinquent property", you could have a delinquent tenant - then you have an A/R on your balance sheet or bad debt expense on your income statement.



All property you buy sits on your books as stock (balance sheet inventory current asset not long-term asset) - ready to sell.

Stock, according to CRA, cannot be depreciated either

One advantage you will should have is flipping properties is an "active business" I believe and taxed at a lower rate then profit in a "passive business" (rental income)



So flipping is just like selling widgets, only your widgets happen to be houses. All other rules apply



Mark

 

[nubiwan]

Sorry! By delinquent, I rather meant rundown / dilapidated properties. I see what you mean by tenants though.



Yes, I understand my income is subject to all my expenses. I was trying to establish how teh 'inventory for resale' is treated in that context.



Finally, what if I purchased properties to lease? Does this make any difference to how the inventory is treated, or would that be looked at as a rental? Just trying to pursue options.



Can you explain what you meant by this: One advantage you will should have is flipping properties is an "active business" I believe and taxed at a lower rate then profit in a "passive business" (rental income)



Are you simply stating that as a result of buying 'inventory" to flip etc., I am able to lower my overall income position? Or is there something in the tax return that offers me a loewr tax rate/rebate on doing this as a business.





Thanks

Tony

 

[Thomas Beyer]

[quote user=nubiwan]

Does this mean my 'income' is treated as my profit less any land acquisition or delinquent properties I buy to renovate?


Income is revenue minus (eligible) expenses.



Land or a house or improvements are usually assets. So if you buy a crappo for $125,000 and fix the bedrooms, living room, basement, bathrooms, kitchen and roof for $50,000 your asset base is now $175,000 .. and if you sell it for $250,000 you have a $75,000 business income. Then you deduct perhaps office expenses or vehicle expenses or some meals and a P/T office assistant .. say $25,000 .. so you pay taxes on your net income of $50,000 !



Income is not an asset ! Land is not income.

 

[nubiwan]

Income is not an asset ! Land is not income.



Sure is an asset when you go to borrow money

 

[moparcanuck]

The purchase of inventory in any business is not an expense at the time of that purchase. It is only an expense when it is eventually sold. If you take the profits from your first sale, and buy any asset, that asset simply goes on your balance sheet (as an asset), not on your income statement (as an expense). When you do eventually sell the second piece of property, THEN it will move to be an expense, but of course you will then have the income from the second sale as well. In accounting, this is referred to as 'matching'. It matches up the income with the appropriate expenses tied to that income.



Hope that clears that up a bit.



Ryan



PS - Before anyone points it out, yes, I am aware that not ALL businesses operate by this rule for taxes, but we're not farmers or fisherman.

 

[bizaro86]

[quote user=moparcanuck]PS - Before anyone points it out, yes, I am aware that not ALL businesses operate by this rule for taxes, but we're not farmers or fisherman


psst... Wanna buy a cattle-based tax deferral scheme???!?!?







Michael

 

[Thomas Beyer]

[quote user=nubiwan] Income is not an asset ! Land is not income.



Sure is an asset when you go to borrow money


May I suggest you take a basic accounting class ?



Income is not an asset.



When you borrow money it is a loan, or payable in accounting terms. The land or building or house you buy with the cash is an asset.

 

[nubiwan]

Hey Thomas, I was just being facetious not factual in the use of the 'asset' term. No hard feelings intended.... I did use a smiley.

 

[moparcanuck]

Heh. I can certainly understand the confusion, but yes, I do believe it was meant as a little tongue in cheek, and has to be read imagining the wry smile on his face.



That being said, I guess when reading the forums, a sense of humor is an asset (just don't try to list it on your balance sheet)