We wanted to walk you through the current real estate market in Toronto, how many businesses have made their profits and some of the accounting & tax implications.
Current Toronto Real Estate Market Update:
Real estate in Toronto has been really lucrative in the past 5-10 years. This has been largely due to the low interest rates driven by the FED and the Bank of Canada. With increased supply of cheap money, this has spawned an unprecedented growth in the Canadian real estate market. With Toronto & Vancouver among the most expensive cities for real estate in the world, this has expanded the industry and business is booming. We have serviced clients in the rental business, development, and "property flipping". There has been a lot of profits made with these transactions as real estate prices have increased double digits every year for the past 10 years.
How Businesses and Owners have made their profits
There are 3 different types of real estate businesses that have accelerated in Toronto:
1) Rental businesses:
Investors typically look for property in the GTA that has a sustainable rental market and that can generate strong cash flow month after month no matter what the prices look like in the future. As long as their is a rental market and the properties are cash flow positive this is the name of the game in this business. These investors tend to be more conservative and are looking for returns in the follow ways:
-Mortgage pay-down return on the properties.
-Cash on cash return on investment via net operating cash flow from the property. ( i.e. rental income less all operating expenses, which includes interest expense as well.)
-Capital appreciation over a longer period of time ( this is more of a bonus for rental property type of investors and usually comes with time rather than a few short years).
2) Development of property:
We have seen great opportunity in the development space in Toronto, as many of our clients have purchased land over the years and are now dividing this land into smaller plots for development of residential and commercial real estate. Typically, the developer will have a sales contract and secure a buyer before development takes place to ensure that they do not have exposure to the market should prices slow down in the near future. Therefore, the costs of development have been budgeted and sales prices locked in so your profit margins are predicable. This has been a great way to profit from rising prices in the Toronto while locking in profits up front.
3) Flipping Property:
The most risky ventures of the 3 noted here since the stragety employs buying property in the hope that the prices continue to rise. This is also know as chasing capital appreciation. Some of have done really while with the right purchases in Toronto, some minor cosmetic upgrades, and then re-selling the properties for a profit. With some examples in the Markham, Vaughn, and downtown Toronto core areas, real estate agents have been experience bidding wars on property, therefore the selling price have closed up to 20% higher than the list price in some cases.
Accounting & Tax Implications
So how is your property treated for tax purposes once you sell?
For tax purposes, the income generated is taxed based on the intent of the property. For example, if the intent was to purchase property and actively manage a rental business, the profit on the sell would be treated as a capital gain for tax purposes ( which is 50% taxable).
For development of property for re-sell and flipping property for profits, the intent is to generate a profit thus this would be treated as business income and not a capital gain ( 100% of the profits would be taxable as business income at the graduated rates.)
For more information on the Accounting & Tax Implications on Real Estate in Toronto please contact on MP Group Advisor.