Owning rental property doesn't mean you are automatically exempt from paying tax on the sale of rental properties.
- You may be regarded as a speculator or dealer for tax purposes
- Capital gains and income
- If you change your investment strategy
- Special rules for dealers
- Changing back to property investment from speculation or dealing
You may be regarded as a speculator or dealer for tax purposes, depending on:
- the reason you bought the property or
- on other factors like a regular pattern of buying and selling or carrying on a property related business.
During periods when housing prices are on the rise, "get rich quick" property schemes are often described as property investment, when they're really property dealing or speculating schemes.
Some property schemes are described as producing capital gains, which aren't taxable, rather than producing income, which is taxable. A number of factors need to be considered when determining whether profits from property sales are capital gains or income.
- your intentions when you bought the property; what you actually used the property for, and
- if you have a regular pattern of buying and selling property.
Some investors may find the returns from buying and selling rental properties are a lot higher than the actual rental income those properties can provide, so they switch from being investors to dealers.
If you start dealing in rental properties, any profits on your sales from the time you become a dealer will be taxable.
This probably won't affect the sale of any rental properties you owned prior to becoming a dealer, assuming you bought them to provide rental income, not for resale.
If your investment strategy changes from investor to speculator or dealer, your tax situation will change too, from the time you make this change.
Dealers and speculators must pay income tax on any gain they make from reselling their property. If they declare a loss, it may be tax-deductible. They must also pay tax on rental income they may earn from the properties.
Once you are (or are associated with) a dealer, special rules apply.
Find out what these special rules are by going to
Properties purchased when you are a dealer or speculator remain trading stock and are taxable upon sale, regardless of any change in your status.
If you buy a rental property when you are a dealer or speculator but then decide to hold it and rent it during a market downturn, any later gain on the sale will still be taxable, even if you're no longer a dealer or speculator.
We recommend you talk to a tax advisor if your intention when you bought your rental property was to resell it.
Date published: 30 Jul 2010