Many ways property can be taxed and some common mistakes
Property tax law is complicated and there are many ways to get taxed.
The biggest mistake I read all the time is that property investors are only considering Brightline. Note this is only one of many taxing provisions for property, and just because you are past Brightline doesn’t mean the property sale isn’t taxable.
1. Common mistake – The timeframe for Brightline is based on the Sale and Purchase (S&P) date for sale and is the shortest period (from settlement for purchase). So, for example if your five years came up in November 2023, but you signed a sale and purchase agreement to sell in July 2023 with Settlement December 2023, this would be a sale within the 5 years and taxable, as the S&P is within 5 years.
2. Joe has owned a residential rental property for 20 years. Could the sale be taxable now?
Generally, most people are thinking there is no way this could be taxable as it has been 20 years. But actually there is 4 possible ways this could still be a taxable sale, so it is important to look at the detail and go through the situation carefully to ensure it is not caught by one of the 4 possibilities.
I’m not going to go through all 4 possibilities, but one is that Joe purchased this as a trading property or from his associated trading entity. As the intention was to buy, do up and sell for a profit, even though it has been kept for 20 years the gains are still taxable, and also if it was sold to a related party, if the related party ever sells, the gains will also be taxable.
3. Jane owns a residential rental property that has two houses on the one title. If she subdivides, will it be taxable?
First – just subdividing is not going to create any tax. One or more of the properties would have to be sold to trigger a taxable event. So be careful if Jane owns the properties, subdividing and putting the back house into an LTC (owned by a Trust), as that is effectively a sale!
Second – Brightline! Obviously if one of the houses are sold, and if it is within Brightline then it will be taxable by that section. By subdividing it doesn’t change the date of purchase, and both properties would keep the original purchase date for Brightline, as long as they stay within the original entity, Jane.
Third – let’s say it is outside of Brightline. Is the gain taxable?
This is where it gets complicated, and we would then have to look at the subdivision rules. As a starting point this would be a taxable gain under the subdivision rules, but there is also lots of exemptions that we would work through, which could make it not taxable.
For subdivisions it is important to understand the different options and tax consequences.
4. Rachel and Joey own a section since 2014, so before Brightline rules. They build a residential rental house on the section and sell it. Is this taxable?
This could be either depending on the circumstances and may also need to consider GST as well.
If you are building and selling straight away, you are most likely caught by a different section of the income tax act.
5. Tom and Vanessa build 5 commercial properties and sell them straight away upon completion.
Obviously commercial properties are not subject to Brightline rules, so not taxed by this section.
But will be taxed under other sections and also liable for GST.
So, if selling commercial, don’t just presume non taxable, as subdivision and other rules still apply to commercial.
So, in general, if you are considering selling a rental (or even personal house), it is worth discussing the sale to ensure there are no traps. There can also be building depreciation recovery for residential purchased 31/3/21 or before, and for any commercial.
Ross and the Team at Lifetime
Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular person's objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.
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