# Will my second property be taxed as income?



## ccm (Feb 13, 2015)

Hey folks! Stumbled upon this forum when looking for some answers and decided to sign up. Lots to learn which I'm excited for 

Now onto the question.. 

So my wife and I have our house fully paid off and are thinking of purchasing a second property. Now, this second property will be a tear down which we are looking to tear down and build on. Now the purpose of this build would be to turn the home into an executive rental home but we're pondering with the idea of selling the place once it's done if there are profits to be made. Now, from my understanding there would be capital gains on the place which I am fine paying but what I would like to avoid is having the gains taxed as income. Is this too risky with the CRA? Are we better off renting the place for a bit prior to selling? Or maybe not even bothering with the idea?

Further to this would the build be a tax right off as far as the CRA is concerned? Thanks in advance!


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## Just a Guy (Mar 27, 2012)

First off, you should only be taxed when you make money...so if you rent the place, you'll be taxed on the rental income, if you sell the place you'll be taxed on the profits.

Until you make real money, not paper profits, you are not usually subject to taxes, you are deferring them.

As for how the money will be taxed, there it can get a little complicated depending on how you do it. Usually it should be taxed as capital gains, but there are a few times when CRA can say it should be taxed differently...but that usually depends on the number of properties you own, how long you own, if you do it like a business, etc. these cases are fairly rare though, so I don't remember the exact details.


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## newuser (Sep 16, 2014)

ccm said:


> Further to this would the build be a tax right off as far as the CRA is concerned? Thanks in advance!


Renovations prior to closing the deal would be claimed as a one time cost of acquisition or according to the Capital Cost Allowance (CCA) schedule depending on the type of expense. Both will affect the capital gain when you sell in the future. CCA lowers the net rental income you report in the tax year, but be careful because it can cause your capital gain to be higher when you sell in the future.

Google the CRA website for more info.

Keep all your receipts and documents and maybe even get a tax accountant. Good luck!


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## nobleea (Oct 11, 2013)

From what I understand, your profits if you sell would be income. I have a good friend who does this on the side (buys tear downs, builds 'executive' homes on them and sells them). He does one or two a year.
If you just bought the lot and then resold it later for a profit, you could argue capital gains. If you bought an executive home and sold it later at a profit, capital gains. But since you are doing substantial work to it (or paying/organizing someone to), it's not really a buy and hold thing for which capital gains are normally applied. You are actually undertaking work. So profits would be income. And you have to pay GST and all that stuff on it, realtor fees, etc.
Depending on the housing market, construction costs, and the lot cost, it can be a very lucrative idea, or a total money pit.
(As an example, I don't think he's netting LESS than 200K on each house, before taxes. these houses all sell in the 1.1-1.5M range)


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## OurBigFatWallet (Jan 20, 2014)

ccm said:


> Hey folks! Stumbled upon this forum when looking for some answers and decided to sign up. Lots to learn which I'm excited for
> 
> Now onto the question..
> 
> ...


Hi ccm, when you say you'd like to avoid having the gain taxed as income....do you mean rental income? The gain on sale would be the difference between the cost (including everything needed to build the place) and the selling price less any commissions, legal fees etc.

Half of the capital gain would be taxable and would be taken into income and taxed at your marginal tax rate. 

If you rented it out prior to selling the rental income would be taken into income in the year it was received and there are several deductions against rental income such as advertising, property taxes, mortgage interest, utilities (if you pay them), etc. 

In order for this to be feasible you'd have to consider what the total cost of the build is, what you could sell it for etc. As a rental you'd want to consider what you could rent it for and what your cash flows would be like on a monthly basis. Ideally the rental income would be higher than your monthly costs.

If you need any help on the topic let me know. I have a rental myself and my site has a bunch of stuff on rental income, taxes, etc.

Cheers


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## ccm (Feb 13, 2015)

nobleea said:


> From what I understand, your profits if you sell would be income. I have a good friend who does this on the side (buys tear downs, builds 'executive' homes on them and sells them). He does one or two a year.
> If you just bought the lot and then resold it later for a profit, you could argue capital gains. If you bought an executive home and sold it later at a profit, capital gains. But since you are doing substantial work to it (or paying/organizing someone to), it's not really a buy and hold thing for which capital gains are normally applied. You are actually undertaking work. So profits would be income. And you have to pay GST and all that stuff on it, realtor fees, etc.
> Depending on the housing market, construction costs, and the lot cost, it can be a very lucrative idea, or a total money pit.
> (As an example, I don't think he's netting LESS than 200K on each house, before taxes. these houses all sell in the 1.1-1.5M range)


This is pretty much what I was wondering, if the taxes would be income or capital gains? In this case it looks like capital gains as actual work is being done. For example, theoretically speaking :

Purchase price : $500,000
Build Price : $500,000
Sale Price : 1,500,000

There would be a profit of $500,000 which would be taxed as income and not capital gains. Is there any way around this? Say the place was rented out for a year and then sold? if someone were to do this often would a holding company be beneficial?


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## ccm (Feb 13, 2015)

*brushyourteeth*



nobleea said:


> From what I understand, your profits if you sell would be income. I have a good friend who does this on the side (buys tear downs, builds 'executive' homes on them and sells them). He does one or two a year.
> If you just bought the lot and then resold it later for a profit, you could argue capital gains. If you bought an executive home and sold it later at a profit, capital gains. But since you are doing substantial work to it (or paying/organizing someone to), it's not really a buy and hold thing for which capital gains are normally applied. You are actually undertaking work. So profits would be income. And you have to pay GST and all that stuff on it, realtor fees, etc.
> Depending on the housing market, construction costs, and the lot cost, it can be a very lucrative idea, or a total money pit.
> (As an example, I don't think he's netting LESS than 200K on each house, before taxes. these houses all sell in the 1.1-1.5M range)


Sorry, I also wanted to add. Does your friend pay taxes on the full profit, or are they taxed as half (capital gains). The only reason why I'm wondering is that the articles I've been reading all mention that the CRA is trying to crack down on house flippers that try and avoid paying taxes in full instead of capital gains tax.


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## CPA Candidate (Dec 15, 2013)

One rental property would not be considered business income (it is passive property income) and gains on sale would be capital gains.

If you have a pattern of buying and selling real estate and are very actively involved in the process, then you have a business and gains are business income. It depends on the facts of the case.




newuser said:


> CCA lowers the net rental income you report in the tax year, but be careful because it can cause your capital gain to be higher when you sell in the future.


CCA has no effect on capital gains, but depreciating your income property will probably result in CCA recapture when you sell which would be included in income.


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## nobleea (Oct 11, 2013)

ccm said:


> Sorry, I also wanted to add. Does your friend pay taxes on the full profit, or are they taxed as half (capital gains). The only reason why I'm wondering is that the articles I've been reading all mention that the CRA is trying to crack down on house flippers that try and avoid paying taxes in full instead of capital gains tax.


He's taxed on the full profits. The lot value (the original purchase price) is only a small portion of the selling value, the significant amount is the new house. Just as if you had a side business of buying rust buckets from farmers and restoring them to showroom quality hot rods, the net profit would be income (minus all expenses).

Those that are saying it would be capital gains are correct IF you only keep it as a rental. For example, if you buy a house, rent it out, then sell it later without tearing it down, then for sure that's capital gains, since the house was just a tool to create income (the rent). The rent is obviously income.
But if the main purpose is to tear down, rebuild and sell, with only a small amount of rental (say a year or two), then you're going to have a tough time convincing CRA that that was not your original intent. Almost everyone I know who does the teardown and rebuild for investment will rent out the original home for some period of time while they get permits/designs/builders lined up.

I believe he has a holding and operating company and all his profits (after being taxed at the corporate level) stay in the holding company. He invests them at that level and pulls a small amount out in dividends.
Your comment about tear down, building, and then renting for a year or two might work. You most likely wouldn't be able to generate a profit on a million$ house, and then it would be quite obvious to CRA that it isn't really a rental and you're just trying to get around being taxed at full income. Not to mention people who are spending 1.5mil on a home would probably prefer it to be in pristine condition, new preferred.

A sample might look more like this:
Lot: 400K
Build: 500K
Sell: 1.3K
Gross profit: 400K
Minus realtor fees, GST, carrying costs (interest), property taxes, builders warranty, accountant fees, etc
Net profit: 280K
Corp tax of say 15%
Profit at holding company: 238K
Withdraw in dividends a small amount each year, taxed at a reasonable rate at the personal level.


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## newuser (Sep 16, 2014)

CPA Candidate said:


> CCA has no effect on capital gains, but depreciating your income property will probably result in CCA recapture when you sell which would be included in income.


Oh yeah, that's right. Forgot about that. The recapture is actually reported as business income. CCA defers the income tax but it's risky because when you sell it'll usually be more than the original cost of the property, you get hit with all the deferred income at once.


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## raceryzf (Feb 18, 2015)

If an individual owns more than one house property for his use, then under the provisions of the Income Tax Act, 1961 (the ‘Act’), any one property as per his choice is treated as self-occupied and its annual value is computed to be nil. The other house property is deemed to be let-out and a notional rent as per the provisions of the Act is computed as the taxable income under the head ‘Income from House Property’. In other words, the second house is treated as being rented-out and its estimated rental income is treated as taxable income. - See more at: http://taxguru.in/income-tax/taxabi...-income-tax-act1961.html#sthash.9ro2nC2M.dpuf


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