You may have heard the term ‘flipping‘ but what is property flipping and why is it likely to become a focus for the Australian Taxation Office? Property flipping is a real estate investment strategy that involves purchasing a property not for your own use and selling them on in a short time frame for a profit. However, you should be aware that the tax law does not allow you to ‘flip’ a property tax-free even if you are living in it.
Most people think that they can move in to a property, renovate it, and then sell it without paying tax. The main residence exemption – the exemption that protects your family home from tax – does not apply if your primary purpose is to ‘flip’ the property for a profit. The fact that you are living in the property does not mean it’s exempt from tax.
Some people reading this are probably thinking, but who is going to know? How can the Australian Taxation Office (ATO) really know what my intention is when I buy a property to live in? Generally, the ATO is looking for a pattern of behaviour or a declaration of intention. For example:
The ATO’s guide on property is clear: “If you’re carrying out a profit-making activity of property renovations also known as ‘property flipping’, you report in your income tax return your net profit or loss from the renovation (proceeds from the sale of the property less the purchase and other costs associated with buying, holding, renovating and selling it).”
People often make the assumption that any gain made from property flipping will be exempt from tax as long as the property is their main residence for the entire ownership period. However, this is only the case where the property is held on capital account. A property would generally be held on capital account if it is bought with the genuine intention of using it as a private residence or rental property for the foreseeable future and there is evidence to back this up.
The ATO indicates that someone who is renovating a property with the intention of selling the property again at a profit could be taxed on revenue account in which case the main residence exemption does not apply.
The guide identifies three main scenarios and the general tax implications:
Just because you live in the property for all or part of the ownership period does not automatically mean that the profits from sale are exempt from tax. The main residence exemption can only reduce capital gains; it cannot reduce amounts that are taxed on revenue account.
MGI South Queensland have a team of specialist tax accountants in Brisbane and on the Gold Coast who are able to offer tax advice on all matters relating to property. In addition if you are looking at wealth management strategies, we can help you to build your wealth portfolio and protect your assets. Contact us today to ensure you don’t attract the unwanted attention of the tax office.
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