Rent to Own - Capital gains or Income

[tony13607]

Hello everyone. new at this so please bare with me. I was recently at a workshop and speaker advised that when property is sold/transferred at end of RTO contract, the monetary gains from sale of house is not capital gains but referred to as income. I always thought the latter. Can someone please confirm which is the case.

Thank you

 

[Thomas Beyer]

That is correct.

The main reason is that the time to exit is known in advance, unlike a normal rental property where the purpose is to collect rental income and the exit, like stocks, is usually unknown.


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[Sherilynn]

Yes, it is income if the initial intention is to sell the house via a lease option within a relatively short time-frame (as far as real estate goes). So you can think of it as a long flip. The property is considered to be an "inventory item" rather than being an investment property.

However, if you are selling property that you purchased as a regular rental, and you exit via a lease option, then you may want to get an appraisal at the time the property becomes an RTO. The value increase during the regular rental period could be capital gains whereas the price increase in the RTO period should be income. (Consult your accountant here, but ultimately it is safer to take the most conservative approach when it comes to the CRA.)

FYI, if you are operating an RTO within a corporation, the income should be considered "active income" and taxed at a lower rate than passive rental income is taxed. So, if you operate the RTO within a corporation, you pay tax on 100% of your income but you pay a lower tax rate; and if you operate the RTO personally, you pay tax on 100% of the income at your personal tax rate. Important if you are considering RTO (or other flips) as a business.