Many clients presume that when they renovate their gains will be exempt from tax, so long as the property being renovated is their main residence. This is not always the case.
We’ve summarised the ATO’s guide to property development, building and renovating, and pulled out key points about the tax implications of property flipping. To read the full guide, visit the ATO website.
What is property flipping?
Property flipping occurs when someone purchases a property with the intention of carrying out renovations and then selling the property once this work has been completed.
Tax implications depend on how the renovation activities are classed. Here we have highlighted the key features that define three different property flipping scenarios, and their corresponding tax consequences.
Personal property investment
If you purchase a property with your main intention being to use it as a private residence or long-term rental property, it’s likely you fit into this category. If you decide to renovate this property over a series of weekends and weeknights, without the intention of making a profit or selling immediately, it can be classed as a personal investment.
If the amount you make from selling the property exceeds the cost of its purchase and the costs associated with renovating, you will make a capital gain. CGT concessions such as the CGT discount and main residence exemption may apply, however, in which case your capital gain may be reduced.
One-off profit making activity
This category refers to someone who buys a property with the intention of carrying out renovations and subsequently putting the property on the market. It is generally an isolated activity, in which renovations are planned, arranged, and performed in a business-like manner.
If you perform a renovation as a one-off profit making activity, you will be taxed on revenue account, and the CGT discount and main residence exemption will not apply. In this circumstance, you must report your net profit (or loss) in your tax return. You are also entitled to an ABN, and may have to register for GST.
Business of property renovation
People who fall into this category undertake property flipping on a repetitive basis, with the primary intention of making a profit. There will be tax implications if your renovation activities are organised in a business-like manner, even if you live in these properties for a period of time.
In this instance, you would calculate your annual profit (or loss) in the same way as any business with trading stock, and would include this in your income tax return. As a general rule, you will not have access to the main residence exemption or CGT discount. If you are in the business of renovating properties you are entitled to an ABN, and may have to register for GST.
While these categories aren’t definitive, there are characteristics of each that can help you discern which one best describes your property flipping activities. Some questions you can ask yourself to figure out what you may be subject to tax-wise are:
- Are your property renovating activities repetitive?
- Are they planned, organised, and carried out in a business-like manner?
- Do you renovate with the intention of making a profit?
- Do you rely on income from your activities to meet regular expenses?
If you’re unsure about what kind of property-flipper you are, or are after more information, take a look at the ATO website or consult your adviser.
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