We have been approached by Entrepreneurs who have wanted to learn more about the tax implications of the sale of their investment properties. Is it a capital gain/loss or business gain/loss?
Generally, the sale of real estate investment may trigger a capital gain/loss or business gain/loss. This must be reported on your tax return in the year of the sale.
Note: Investors with a gain prefer to report this as a capital gain, while investors with a loss prefer to report this as a business loss. The tax treatment of the transaction should not influence how you report the sale.
A gain or loss is calculated by subtracting the original cost of the property (includes amounts such as the price you paid, legal costs, land transfer taxes, leaseholds, etc.) from your proceeds (includes the price you received, less real estate commissions, legal fees, etc.) You may also have a recapture of income or a terminal loss, depending on the capital cost allowance previously taken.
A reported capital gain will be taxed on 50% of your gain at your marginal tax rate. Alternately, a business gain will be taxed on the full amount of the gain at your marginal rate.
Capital and business losses do not go unused but can be utilized to lower current, past and future taxes. Contact us for the rules pertaining to capital and business losses.
Determining capital or business gains/losses for tax purposes can be a little tricky but here are some helpful guidelines:
1. Your intention at the time of your purchase
Was it to collect the rent(s), or to make a quick profit? Generally, if your primary intention was to make a profit at the first opportunity, then the gain may be treated as business income.
2. The period of time and frequency of transactions
If you purchased and sold the property within a short period, and this has been done frequently, it may be considered business income.
3. The nature of your occupation
If you are involved in the real estate field and the transactions are close to your calling or trade, it may be considered as conducting a business.
There are no clear provisions in the income tax act that specifically describes if your sale is a capital or business gain/loss, however, the guidelines above should help. For more information and to answer any questions you may have, contact us. We are here to help.