Tax implications of buying real estate to sell for a profit

One of the advantages of being a real estate professional is that you can spot a gem and quickly turn it into a good investment. Finding a perfect house to renovate and sell quickly can be a great way to invest your money and make a profit – but did you know this profit has tax implications?

The Canada Revenue Agency (CRA) has found some real estate transactions are not being reported or are being reported incorrectly. Understanding your tax obligations before you make an investment in real estate can help you make an informed decision and save you or your clients from making costly errors.

Property flipping and assignment sales are two common ways to make a profit in real estate. If you or your clients decide to pursue one of these transactions, the most important thing to know is when it comes to identifying tax implications, the CRA considers your intent at the time the property was purchased.

The profit you make on the sale of a property is considered either a capital gain or business income, depending on the circumstances. Generally, the profit is considered business income if you purchased the property with the main intention of selling it for a profit, such as the case with property flipping. In this situation, even if you live in the home while it’s being renovated, the profit would still be considered business income.

The same logic applies to assignment sales. For example, you decide to buy a condo with the intent to sell it for a profit but, before you take possession of it, you sign over the legal rights and obligations of your purchase and sale agreement to someone else. Any profit resulting from the sale would generally be considered business income to be reported in the tax year in which you assigned the contract to the second buyer.

If you are involved in an assignment sale or are flipping a property for profit, the sale may be subject to goods and services tax / harmonized sales tax (GST/HST). For more information on the GST/HST impacts, visit RC4052 GST/HST Information for the Home Construction Industry or Assignment of a Purchase and Sale Agreement for a New House or Condominium Unit.

If you did not report the money you made on a real estate transaction to the CRA correctly, you may qualify for relief through the Voluntary Disclosures Program, which offers taxpayers the chance to correct or complete their tax information.

For more information on tax obligations associated with investing in real estate go to: Canada.ca/taxes-buying-real-estate-to-sell.

The article above is for information purposes and is not legal or financial advice or a substitute for legal counsel.

Harry began his career in the Canada Revenue Agency (CRA) as an Income Tax and GST auditor in 1998 at the Ottawa Tax Services Office. Harry moved to CRA headquarters in 2004, and has since held various positions with increasing levels of responsibility within the Domestic Compliance Programs Branch. Since May 2018, he has been the Director General of the Small and Medium Enterprises Directorate. Harry holds a Bachelor of Commerce (Accounting) from the University of Ottawa and is a Chartered Professional Accountant (CPA, CMA).


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