Is there any way around taxes on a rev property sale?

[Goodstuff]

If anyone has been able to avoid the capital gains tax on the sale of a revenue property I`d sure love to hear your story.

I know in the US it`s possible if you buy another property within a certain amount of time, but I don`t think we have such a thing in Canada.

Thanks for your input.

 

[ToddStokowski]

Hi, currently there are no provisions in the Income Tax Act that allows you to defer capital gains when passive real estate assets are sold.

The issue was on Harper`s election platform, but has yet to be introduced by the Conservatives.

When land and buildings are used in an active business and then sold, there are replacement property rules that currently exist in The Income Tax Act that allow the profit to be deferred - but only under certain conditions.

Hope that helps.

Todd Stokowski, CA

 

[betrina]

With VTB`s you can defer for up to 5 years.

- only on the carried portion. There is a thread about this from way back.
Also here is an excellent paper from Navaz http://www.realaccountant.com/files/vtb.pdf

If you charge interest on the portion you carry, it is business income, not capital gains.
Link to thread

 

[Goodstuff]

Thanks for your replies.

What is a VTB?

Thanks.

 

[UTCVenturesLtd]

QUOTE (Goodstuff @ May 2 2008, 01:23 AM) If anyone has been able to avoid the capital gains tax on the sale of a revenue property I`d sure love to hear your story.

I know in the US it`s possible if you buy another property within a certain amount of time, but I don`t think we have such a thing in Canada.

Thanks for your input.

Try a creative financing contract with a buyer... They buy the property over 3 to 5 yrs in one lump sum per year, so you just have to claim a portion of the capital gain each year! That would spread the amount payable over a longer period of time. It doesn`t avoid it, but can reduce your capital gains tax.

 

[betrina]

QUOTE (Goodstuff @ May 3 2008, 02:03 AM) Thanks for your replies.

What is a VTB?

Thanks.

Vendor Take-back. The vendor carries part or all of the mortgage instead of the bank. We just bought a house from a lady in town who is financing us 92.5% of the sale price of the home. She only wanted enough down payment to cover the Realtor fees so we pay her a monthly interest payment on the balance instead of paying that interest to the bank.

More common is for the vendor to carry some portion of the down payment 10%, 15%, 25%... whatever. Then the seller goes out and gets financing for 75 or 80% from a bank.

Hope that helps.

Trina Burgess
Wise Investments

 

[Thomas Beyer]

Many options .. some illegal .. some allow you to post-pone / defer taxes:

ILLEGAL OPTIONS (not recommended by the author, but just to clarify what you could do)
You could not declare it. This is illegal. But lying pays in life for some people. I hear that many folks do that and never get caught. Yes, even some REIN members.

You could also declare a building as "inventory" and roll it forward, much like 1031 exchange in the US. Also illegal here in Canada, but some folks do it and get away with it.

TAX DEFERRAL OPTIONS:

You could do a section 85 rollover at a lower cost base and post-pone taxes .. usually doen between related parties such as husband and wife or from person to his company or vice versa.

You could sell shares in the company that hold the asset. The building doesn`t get sold, just the company shares.

You could also do a LONG TERM LEASE or a LONG TERM AGREEMENT-FOR-SALE. So instead of selling a $1M building for $2M today, you sell it for $2M (or $1) in 20 years, and collect XXX $s per year for 20 years. You pay tax on income for 20 years, then a capital gain in 20 years, or none. Consult with a lawyer and accountant.

Example: building is worth $2M. You bough it for $1M. You lease t for 20 years for $150,000/year. This is taxable as income, every year for 20 years subject to certain deductions like depreciation or interest expenses you may have on the property you still own. In 20 years the book value is 0 and you sell it for $1. Taxes are spread out over 20 years as is income. Consult with a lawyer and accountant.

You could do a vendor-take-back mortgage (VTB), i.e. a very high 2nd mortgage at some XYZ % interest rate. Capital gains is payable one initial received cash and then again on VTB cash when it gets paid, years later.

You could also NOT SELL IT. Why sell, when you can re-finance ?

 

[Anonymous]

Yes, I have sold properties and not paid taxes on the profits...legally. Here`s how: I use the profits to finance renovations on my other properties. The renovations are an expense which offsets the profits. Eg: $100,000 profit from one sale can do a big reno on one other house or be divided between a few houses to spruce them all up a bit. That $100,000 equity just got transferred from the outgoing house to rest of the portfolio! In fact, it raises the value of the portfolio more than $100,000 because the remaining houses will usually appraise higher than the costs of the renos. The improvements to the properties also allows an investor to charge higher rents! You can then refiance your properties (or put on second mortgages) and access your equity as cash. Use this cash for whatever you want (pay yourself, buy another property, etc.). This way you have accessed your profits from your sale legally and without paying taxes. I have done it several times and I know it works, with the blessing of my accountant and the CRA.

By the way, this my first time exploring myreinspace and its my first post. I`m a late bloomer, but glad to be aboard!

Catherine Brooker, Edmonton

 

[realfortin]

QUOTE (cbrooker @ Jun 22 2008, 09:31 AM) Yes, I have sold properties and not paid taxes on the profits...legally. Here`s how: I use the profits to finance renovations on my other properties. The renovations are an expense which offsets the profits. Eg: $100,000 profit from one sale can do a big reno on one other house or be divided between a few houses to spruce them all up a bit. That $100,000 equity just got transferred from the outgoing house to rest of the portfolio! In fact, it raises the value of the portfolio more than $100,000 because the remaining houses will usually appraise higher than the costs of the renos. The improvements to the properties also allows an investor to charge higher rents! You can then refiance your properties (or put on second mortgages) and access your equity as cash. Use this cash for whatever you want (pay yourself, buy another property, etc.). This way you have accessed your profits from your sale legally and without paying taxes. I have done it several times and I know it works, with the blessing of my accountant and the CRA.

By the way, this my first time exploring myreinspace and its my first post. I`m a late bloomer, but glad to be aboard!

Catherine Brooker, Edmonton


Essentially you are deffering your taxes as you are increasing the Capital gains on the property you are improving. Eventually when you do liquidate all your properties you will take the hit then.

I may use a similar technique for withdrawing RRSPs. Example: Withdraw 40k RRSPs (would be taxed at 43% of 40 k) and use the 40 k to renovate a property. Sell the property and it is then capital gains, which is taxed at half the rate.

 

[Thomas Beyer]

QUOTE (realfortin @ Jun 22 2008, 02:08 PM) Essentially you are deffering your taxes as you are increasing the Capital gains on the property you are improving. Eventually when you do liquidate all your properties you will take the hit then.

I may use a similar technique for withdrawing RRSPs. Example: Withdraw 40k RRSPs (would be taxed at 43% of 40 k) and use the 40 k to renovate a property. Sell the property and it is then capital gains, which is taxed at half the rate.

not so simple .. as it is INCOME if you do it a lot .. so if you buy an old house (or 4) with the intention to upgrade and sell .. and may carry 3-4 houses at a time even .. their sale all would be deemed REVENUE and thus any profit INCOME .. and thus, all expenses would be expensed (say a new kitchen, new roof ..) .. i.e. expenses and income .. NO CAPITAL GAIN whatsoever !

 

[Nir]

Thank you "goodstuff" for the GREAT question and the SUPERB advice from some high caliber investors who replied here.

For obvious reasons, I find this to be one of the most valuable posting ever!

Thanks again everyone!
Neil