Rent to Own vs Selling Property - tax considerations

[nubiwan]

I bought a home in January to renovate and flip, but I am concerned about the income this will trigger if I now sell it within 6 months of the purchase. I stand to make about $50K on sale after all my renovations. So I`d likely lose a hefty chunk to the feds.

In short - Bought house for $65K invested $70K selling price is $200K, perhaps higher.... OK so more than $50K

My question is this:

If I do a rent/lease to own (or simply rent it out), then when I sell it 12-24 months down the road, will this income then be treated as a capital gain on an asset, thereby lowering the taxes I need to pay on the property`s disposition?

That making any sense to anyone?

Is there any other way I can avoid the income tax, if I do sell it? I know in the US they have a reinvestment process (form 1031) that lets you defer taxes on property sales. Anything similar exist in Canada? Other ideas?

I do plan to take my equity and buy another property to flip or rent.

Tks

Nubiwan (tony)

 

[Oli]

QUOTE (nubiwan @ Sep 24 2010, 02:13 PM) I bought a home in January to renovate and flip, but I am concerned about the income this will trigger if I now sell it within 6 months of the purchase. I stand to make about $50K on sale after all my renovations. So I`d likely lose a hefty chunk to the feds.

In short - Bought house for $65K invested $70K selling price is $200K, perhaps higher.... OK so more than $50K

My question is this:

If I do a rent/lease to own (or simply rent it out), then when I sell it 12-24 months down the road, will this income then be treated as a capital gain on an asset, thereby lowering the taxes I need to pay on the property`s disposition?

That making any sense to anyone?

Is there any other way I can avoid the income tax, if I do sell it? I know in the US they have a reinvestment process (form 1031) that lets you defer taxes on property sales. Anything similar exist in Canada? Other ideas?

I do plan to take my equity and buy another property to flip or rent.

Tks

Nubiwan (tony)

An accountant I interviewed a few days ago that a RTO, even with a contract of 3 years will not be considered capital gain because you had the intention to sell it from the start (for the CRA it`s all about intent). As such you won`t benefit from the 50% exemption. Ouch (same for me).

The "1031 Exchange" in the US: you need to have owned the property a minimum of 1 year before you sell. And even so you can only trade equal or up. I.e. you have to buy a property of equal or high value to defer to gains. I don`t think there is such a thing here unfortunately (but I`d love to be wrong on this).

What my property manager does on his renos: DON`T sell, but instead you refinance the property at the new value to take cash out.

 

[nubiwan]

QUOTE (Oli @ Sep 24 2010, 05:34 PM) An accountant I interviewed a few days ago that a RTO, even with a contract of 3 years will not be considered capital gain because you had the intention to sell it from the start (for the CRA it`s all about intent). As such you won`t benefit from the 50% exemption. Ouch (same for me).

The "1031 Exchange" in the US: you need to have owned the property a minimum of 1 year before you sell. And even so you can only trade equal or up. I.e. you have to buy a property of equal or high value to defer to gains. I don`t think there is such a thing here unfortunately (but I`d love to be wrong on this).

What my property manager does on his renos: DON`T sell, but instead you refinance the property at the new value to take cash out.


Hmm, it`s a nice house, so keeping it is not so bad. My problem is that I am leaving $50K in the house after a refi of 80% at the bank. Are there lenders that will refi higher ratio? Assume not. It does free up my cash to buy another property. I guess I could be looking at a buy and hold strategy for the duration as I get more properties.

 

[markl]

This is not a tax issue. The question becomes what are you going to use the profit for? What type of return will it get you? Is it higher or lower than doing a rent to own? The other thing is having equity in a home is not a bad thing. You would have gotten 100% of your money out so you are essentially in for $0. So your return is incredible.

If you want the cash out why not JV the deal and hold a portion while you RTO it and sell in the prescribed time?

Regards,

 

[nubiwan]

QUOTE (markl @ Sep 25 2010, 12:41 AM) This is not a tax issue. The question becomes what are you going to use the profit for? What type of return will it get you? Is it higher or lower than doing a rent to own? The other thing is having equity in a home is not a bad thing. You would have gotten 100% of your money out so you are essentially in for $0. So your return is incredible.

If you want the cash out why not JV the deal and hold a portion while you RTO it and sell in the prescribed time?

Regards,


I see that, but I am nubi investor with 5 units right now. My initial intent for this property was to take the profit out as an income. The remaining funds all came from HELOCs, so it`s not really cash I want to spend as income, rather invest, if you follow.

However, if I end up paying a chunk of tax in my profit, then I`d like to defer it somehow. Seems I cannot, so holding, is not a bad thing. I now have another nice house with equity,and have my investment money back out which is a plus, as you say.

Care to elaborate on the last comment you made? Perhaps in small words as it went about 20,000 feet over my head. How would the deal be structure with a JV partner?

Thanks for all the replies.

 

[nubiwan]

The fascinating (or perhaps not) thing is that I had my home listed for sale on Kijiji (Top Ad) for about 2 months and got perhaps 15 calls. I listed my home `rent to own` yeserday and got 15 emails in one day. Go figure.

I`ve since invited all those interested in my numbers (about 3 of the 15) to contact my mortgage broker to see if they can qualify. If nothing else, it`s a pretty decent marketing strategy.