A question about Capital Gains

[nubiwan]

In a hypothetical scenario where I buy a property for say 100K, Invest 50K in renos and it gets appraised at 250K. Then refinance it at 90%. From this $225K refinance, I profit 225K less 150K (my original investment)or $75K.

I then sell the property at a later date for $250K. Pay off my $225K loan and pocket another $25K.

Can comeone tell me how capital gains is caluclated on that mess. Assuming ofcourse that I am carrrying on this as a business and this property is treated as inventory.

Guess I am asking, is my $75K from the refinance sheltered from tax, or just unitl I sell the property? Is it sheltered as long as I own the property? Assuming there is no relief from CRA on this kind of skuldugggery.

If I rented the property to a tenant, then how long does it need to be rented before CRA will consider this for the 50% capital gains exclusion (if that`s the appropriate term)?

Is there any advantage in forming a coporation to attempt to offset these capital gains (well probably just investment income really), assuming I am making around $100-150K per annum off these flips?

Finally, exactly how does CRA know I have either bought or disposed of properties in a calendar year, beyond my telling htem in a tax return? Sure you can all read into that one, but surely a question hat has been asked before. I just never found a person with the answer.

Thanks All

 

[nubiwan]

QUOTE (nubiwan @ Oct 11 2009, 10:53 PM) In a hypothetical scenario where I buy a property for say 100K, Invest 50K in renos and it gets appraised at 250K. Then refinance it at 90%. From this $225K refinance, I profit 225K less 150K (my original investment)or $75K.

I then sell the property at a later date for $250K. Pay off my $225K loan and pocket another $25K.

Can comeone tell me how capital gains is caluclated on that mess. Assuming ofcourse that I am carrrying on this as a business and this property is treated as inventory.

Guess I am asking, is my $75K from the refinance sheltered from tax, or just unitl I sell the property? Is it sheltered as long as I own the property? Assuming there is no relief from CRA on this kind of skuldugggery.

If I rented the property to a tenant, then how long does it need to be rented before CRA will consider this for the 50% capital gains exclusion (if that`s the appropriate term)?

Is there any advantage in forming a coporation to attempt to offset these capital gains (well probably just investment income really), assuming I am making around $100-150K per annum off these flips?

Finally, exactly how does CRA know I have either bought or disposed of properties in a calendar year, beyond my telling htem in a tax return? Sure you can all read into that one, but surely a question hat has been asked before. I just never found a person with the answer.

Thanks All

bump - anyone care to comment?

 

[invst4profit]

I guess we all just have accountants that take care of that sort of thing for us.
I also know there are a lot of things that are not reported so ............I don`t know.

 

[jseib]

refinancing doesn`t affect Capital Gains... You would pay on the difference between what you paid for it and what it sells for.. Also if you depreciate the property you would have to pay capital gains on whatever you depreciated.

I`m not sure about the renovations though... I want to say you don`t pay capital gains on them but it may depend on whether your doing it yourself and to what extent you do them... If its repairs it may be different then say adding value by finishing a basement or putting in a deck.

Anyone want to back me up on that one? Been a few years since I talked to the accountant about this..

 

[ChrisDavies]

That`s a great question, and well laid out. I know one answer for sure, and I`m sure others will have answers to the calculations. You`re going to have to have a serious sit-down with a good accountant though.

QUOTE (nubiwan @ Oct 11 2009, 07:23 PM) If I rented the property to a tenant, then how long does it need to be rented before CRA will consider this for the 50% capital gains exclusion (if that`s the appropriate term)?

There`s no actual date, it`s your intention for the disposition of the property. If you`re planning to flip it, you`re toast. If you`re planning to hold it, and that`s reflected in your documents and how you manage the property, but then happen change your mind and dump it when the market picks up, you`re clear. The thing is, there aren`t very many good ways to hold for less than a year or two, as the folks at CRA are smart, and the risks are very high. You`d be put in a pretty bad position with a $50k tax bill per property, plus penalties.

Stay away from the grey areas.