Howdy, there may be some debate on how a Rent to Own is taxed... Capital Gains vs. Business Income (and that can be a big difference). There are quite a few detailed discussion threads on the members only section of the forum for this topic, but I believe that the orginal poster would not be able to get access to all the information on the members only side.Bottom line, is make sure you surround yourself with like minded people and get a good team around you to help you with your decisions.
My position has always been regarding Rent to Own, this is a SELLING strategy (albeit it may take many years to complete), but you are selling your property to someone. Make sure you are clear on your long term plans when it comes to your Real Estate portfolio. Most people who I know that have made tremendous wealth in Real Estate are people who have taken a long term approach to this business and are long term `holders` of their properties. When the time comes that you want to sell. Rent to Own is a great exit strategy and great way to help sell your property to someone who may need some help... but only when you are ready to sell.
Here is a good post from an accountant that was just recently at our REIN™ meeting presenting.
Quote courtecy of George Dube, Real Estate accountant, talking about the potential tax issues , it was interesting to see in the REIN™ members only thread this quote comes from that there were three different accountants, and although the agreed to some points, each had a difference of opinion... go figure, that when it comes to tax that there is no black and white answer, and each of the accountants on the thread were Real Estate accounting experts. I guess the message is make sure YOU and YOUR accountant are on the same page...
QUOTE ...Just to add to the confusion and contradictions, clearly this is a difficult topic and I believe equally clear there is not an obvious answer. For what its worth, generally speaking I believe "rent to owns" are income in nature and have treated them as such in my own case. I acknowledge that there are a handful of court cases where the option to purchase can be treated as a capital gain (but would suggest that generally speaking since 1980 these would be categorized as stand alone transactions often involving real estate used to house a business). I agree with Navaz`s line of argument to be made if you are trying to pursue the capital argument. I think that both Navaz and Todd have provided great comments (I delayed originally responding to Todd and your comments as I thought it would be unfair to do so before the meetings in Calgary and Edmonton). It further shows how very intelligent and capable advisors can look at similar situations and walk away with different opinions.
My primary reasons for suggesting income in a general sense:
- if not a primary reason on purchase to sell the property, certainly an extremely strong secondary purpose as evidenced by the typical agreements and typical advertising
- many investors will have a history (or soon will by the time the audit arrives), frequency of transactions (i.e. not a stand alone transaction), potential involvement with other sophisticated investors, and be sophisticated investors themselves
- certainly debatable whether 5 years is a long period of time (but admittedly much better than 2 or 3 years)
- the whole name "rent to own" in my mind is highly suggestive of the primary intent
- court cases since 1980 (but highly caution that alternative opinions could be formed)
- discussions with senior CRA auditors (but as per Todd`s comments, these are not conclusive)
- other factors as indicated in my checklist can point towards either capital or income
Warm regards...
George
Trust this helps