The tax-free property flip myth
I get a lot of questions from people who want to purchase a property, live in it, do it up and sell it at a for a profit and then repeat the process; aka a property ‘flip’.
In previous articles, we have discussed the Main Residence Exemption; to recap: Your ‘main residence’ (your home) is generally exempt from capital gains tax (CGT). To be eligible for the exemption, the property must have a dwelling on it and you must have lived in it.
By living in the property while renovating it, many believe that as it is their main residence then any profit they make will be tax free.
Unfortunately, tax law does not allow you to ‘flip’ a property tax-free even if you are living in it.
In a recent case a person was found guilty and sentenced to jail for not declaring GST and profit on properties that they purchased, developed and sold between 2005 and 2011. (For more information see https://www.ato.gov.au/Media-centre/Media-releases/Property-flipper-the-new-kid-on-the-jail-block/).
In determining if what you are doing is a ‘property development business’ or just ‘home ownership with improvements’, the ATO will take into account the following:
- Intent when you purchase the property – If you are entering into a transaction (purchase of the property) with the intent of making a profit, this signals to the ATO that you are looking to run this as a profit-making activity and therefore any profits will be subject to tax.
While most people probably never put on their home loan application “to make a profit” there are indicators when purchasing a property that will stand out including: choice of house style and the selection of an area that meets your needs (what you want and need in a changes over time). Therefore, if you are purchasing similar houses in similar suburbs (as you know the area and are good at doing that style up) then this would indicate that your intention was to make a profit. - Frequency of transactions – The ATO receives property sale transaction information from the various state bodies (e.g. Revenue SA) and hence have very accurate historical information about the number of property sales that you have been involved with.
The more transactions there are, the more likely the ATO will start asking questions. Remember the ATO has hindsight – they can see what you have done!
There are often genuine reasons why people change properties and, in these cases, it is easy to justify that it wasn’t a profit-making exercise and should, therefore, be tax free. These include:
- Changes in family size – either more space or less space becomes a requirement;
- Financial – some people downsize to reduce their monthly commitments; other people receive money (e.g. an inheritance) and want to buy their dream home;
- Work relocation;
- Move to a location that suits their needs or desires more – for example moving closer to shops or a move to the country.
There are plenty of TV programs that make renovating and flipping property look lucrative and even fun, but before thinking that this is the path to tax-free riches look at your intentions and if the intent is to profit, then factor-in the associated taxation implications.
If you’re thinking of ‘flipping’ a house for whatever reason, contact us before you start so you can make sure you don’t get caught by the myth of the tax-free property flip!