5 Major Tax Mistakes That Can Ruin Your Real Estate Investments
Rich Dad Poor Dad is a famous book which has made many people interested in real estate investing. The book teaches how to invest in properties, collect rent, and let the investments work for you. But if you are investing in the real estate market for the first time, you are not likely to know where, when and how to invest. Here are some major tax mistakes that can ruin your investments in Canadian real estate.
HST residential rebate on pre-constructed houses
In case you buy a new pre-construction home and don’t plan to move into it, tell the builder that you won’t be moving in. By doing so, you will need to pay the HST rebate upfront during closing. However, you can get the same amount of HST rebate back by putting the home on lease. Try avoiding falling into the trap that most taxpayers do. You can take the help of a company which offers VAT filing services for this purpose.
Many investors make the mistake of thinking that selling a house will always be regarded as a capital gain and only 50% of the profit would be taxed. However, not every property sale is regarded as a capital gain. In case you are a flipper, buy a property, get it renovated, flip it for a profit, then you will be considered to be engaged in the business of flipping properties. Profit is regarded as income and is 100% taxable.
In case you don’t know, the highest personal marginal tax rate in Ontario at present is 54%. You might think that if you make a profit of $100K, only $50K will be taxable and you will need to pay just $25K as taxes. However, in case you flip a property, $100K will be taxable and there are chances that you will owe $54k of taxes from the sale of that property. Get in touch with an accountant who offers VAT assistance and is familiar with real estate investing. They will advise you on the exact structure you should follow to minimize tax before buying a property for flipping.
If one of those involved in real estate wholesaling, your income will be considered as a business income and will be 100% taxable. In case the wholesale fee that you earn is over $50K, then you will be exposed to HST.
Primary Residence Exemption
In case you sell a primary residence, you will have to report about its sale. If you want to ‘’flip ‘’ a house by claiming that you are moving into the property and reporting it as a sale of primary residence, it won’t work either. In case you buy a house, break it down and build a new one to sell it for making a quick profit, you cannot claim that the property was your primary residence and avoid paying taxes for it.
CRA will go through the facts related to the case and find out what your intention regarding the property is. They will look into factors such as your profession, frequency of deals, advertising efforts that are involved, amount of work that has been done, etc. to decide whether a specific transaction can be regarded as a business transaction or not. In case they consider that it is a business transaction like a flip, you won’t be eligible to claim it as a sale of your primary residence. If it is regarded as a flip, 100% of your profit would be taxable.
Unreported HST On New Homes Or Substantially Renovated Homes
As per existing law, a person who is regarded as a builder needs to charge HST on the sale of a new building. Many investors are caught unawares by the extra cost which they had never considered. The actual truth is that every single business owner will have to collect HST on CRA’s behalf. CRA also regards you as a new builder if you have renovated your property substantially. Ensure that your account for this HST is payable within your budget so that you are not caught unawares as in the case of other investors.
Paying Way Too Much
The major mistake which real estate investors make is paying a much higher amount for buying a property. Most investors forget that they don’t actually make a profit when they buy a property. They do so when they sell it. To make money by investing in real estate, you will have to ensure that you buy a property at a good price. If you buy a property at a high price, your ROI will suffer since there will be very little appreciation of the property. You may even suffer a loss.
If you don’t get a good deal, you may face a tough time getting a substantial return taking it consideration all carrying costs. Owning a property involves ongoing costs such as property taxes, maintenance, etc. unlike other types of investment like stocks. Therefore, you must be really sensitive to the purchase price of a property. Even a noteworthy rise from the purchase price to the sale price can cause a below-par return.