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Taxes on sale of Rent to Own property

H

hanwellboy

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If I have a tenant/buyer who purchases my property at the end of the lease term, do I pay taxes on that sale as income earned?
IE: If I make $60,000 a year at my job, and realize a profit of $15,000 from the sale of my property, do I now pay income tax on $75,000 instead of $60,000? Does Capital gains come into play? Any insight would be much appreciated.

Aaron
New Brunswick
 
Aaron, it all depends on who held title to the property. If it was held in a corporation, your corporation would pay tax as "income" at the corporate tax rate. If you held title in your own personal name, you would pay tax as "income" at a personal rate. The amount of tax will ultimately depend on which tax bracket you are in. Please note: I am not a tax advisor, so you should consult with your own accountant or tax advisor on this one. Hope this helps?

QUOTE (hanwellboy @ Sep 21 2009, 10:08 AM) If I have a tenant/buyer who purchases my property at the end of the lease term, do I pay taxes on that sale as income earned?
IE: If I make $60,000 a year at my job, and realize a profit of $15,000 from the sale of my property, do I now pay income tax on $75,000 instead of $60,000? Does Capital gains come into play? Any insight would be much appreciated.

Aaron
New Brunswick
 
If CRA decides that you are in the business of buying properties with your intent being to sell rather than to hold, as is the case with RTOs, then the gains will be taxed as Income and not as Capital Gains.
 
QUOTE (GarthChapman @ Sep 21 2009, 03:57 PM) If CRA decides that you are in the business of buying properties with your intent being to sell rather than to hold, as is the case with RTOs, then the gains will be taxed as Income and not as Capital Gains.


So what would be better? Taxed as income or Capital gains. I`m really kind of fuzzy on this tax stuff.
 
QUOTE (hanwellboy @ Sep 21 2009, 01:58 PM) So what would be better? Taxed as income or Capital gains. I`m really kind of fuzzy on this tax stuff.

Capital Gains treatment is "better" because less of the gain is included in your taxable income, so you pay less tax. The question is, which one are you allowed to take. I`d actually be interested in knowing what the line is on this as well. Is a RTO alway income instead of capital gains? What about where it has been held as a rental for X years? Does that affect the CRA`s view of the situation?

Michael
 
QUOTE (bizaro86 @ Sep 21 2009, 01:06 PM) Capital Gains treatment is "better" because less of the gain is included in your taxable income, so you pay less tax. The question is, which one are you allowed to take. I`d actually be interested in knowing what the line is on this as well. Is a RTO alway income instead of capital gains? What about where it has been held as a rental for X years? Does that affect the CRA`s view of the situation?

Michael

CRA makes their ruling on several criteria as to whether the gain is Capital or is Income. One of those is `intent`. It doesn;t matter how long you hold the property. Once you do a RTO you have clearly determined your intent is to sell, hence Income and not Capital Gain.
 
QUOTE (GarthChapman @ Sep 21 2009, 02:24 PM) Once you do a RTO you have clearly determined your intent is to sell, hence Income and not Capital Gain.

Really? What about if you had held the property as a rental for say 25 years, and were then selling it. Obviously in that situation a regular sale would be capital gains, so wouldn`t a RTO (Which is basically just a sale with a long closing period) also be capital gains?

I`m not doubting you, I`m just suprised. Although I suppose I shouldn`t expect the tax laws to be sensible/fair...

Michael
 
I touched base on this particular subject on a different post, but for the benefit of all on this particular thread, I will say this again.
There used to be a bigger difference on the amount of tax payable between that of "Income" versus a "Capital Gain". This spread is not nearly as big as it once was, so I would not personally get too hung up on it.

Garth is right, when you get involved in the "RTO" arena or the "flipping" of houses; you are essentially in the "retail" game of real estate. As a result, you WILL be taxed as Income, and NOT Capital Gains.

Now don`t get too discouraged, as there are some HUGE benefits associated with creating a "payday" for yourself today! Having some "cash in your pocket" will help you to..."Enjoy the Journey"!

My advice; if you want to keep your "rental" (buy and hold) properties separate from your "RTO`s" or "flips", the BEST thing you can do is hold them in a completely different corporation. As Garth has already stated, the key criteria that CRA will look at is…What was the original INTENT? It is much better if you are Pro-Active and plan for the event before the event happens. If you wait until later, your options are limited!

As I mentioned earlier in this thread, I am NOT a tax advisor, an Accountant or a Lawyer, so it is best if you consult with your own professional advisors on this one, as it can get a bit complicated. I hope this information will be of assistance to everyone?

QUOTE (bizaro86 @ Sep 22 2009, 03:36 PM) Really? What about if you had held the property as a rental for say 25 years, and were then selling it. Obviously in that situation a regular sale would be capital gains, so wouldn`t a RTO (Which is basically just a sale with a long closing period) also be capital gains?

I`m not doubting you, I`m just suprised. Although I suppose I shouldn`t expect the tax laws to be sensible/fair...

Michael
 
QUOTE (tonypeters @ Sep 22 2009, 09:14 PM) I touched base on this particular subject on a different post, but for the benefit of all on this particular thread, I will say this again.
There used to be a bigger difference on the amount of tax payable between that of "Income" versus a "Capital Gain". This spread is not nearly as big as it once was, so I would not personally get too hung up on it.

Garth is right, when you get involved in the "RTO" arena or the "flipping" of houses; you are essentially in the "retail" game of real estate. As a result, you WILL be taxed as Income, and NOT Capital Gains.

Now don`t get too discouraged, as there are some HUGE benefits associated with creating a "payday" for yourself today! Having some "cash in your pocket" will help you to..."Enjoy the Journey"!

My advice; if you want to keep your "rental" (buy and hold) properties separate from your "RTO`s" or "flips", the BEST thing you can do is hold them in a completely different corporation. As Garth has already stated, the key criteria that CRA will look at is…What was the original INTENT? It is much better if you are Pro-Active and plan for the event before the event happens. If you wait until later, your options are limited!

As I mentioned earlier in this thread, I am NOT a tax advisor, an Accountant or a Lawyer, so it is best if you consult with your own professional advisors on this one, as it can get a bit complicated. I hope this information will be of assistance to everyone?

Sounds simple enough to me. Thanks Tony.
 
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