If you're considering investing in real estate or are already a property owner, it’s crucial to stay informed about the latest tax changes and rules that could impact your investment strategy. Here’s an overview of some important tax updates and rules you should be aware of.
Short-Term Rentals and Deduction Changes (Effective January 1, 2024)
As of January 1, 2024, property owners can no longer deduct expenses related to non-compliant short-term rentals. This includes all expenses, such as interest costs, for any short-term rental properties that do not comply with local regulations. If you’re operating short-term rentals, ensure you're compliant with your local zoning and licensing requirements to remain eligible for deductions.
BC Home Flipping Tax
If you’re flipping homes in British Columbia, the BC home flipping tax could significantly impact your profits. This tax applies if you sell a property within two years of ownership. For properties sold within 365 days, the tax rate is 20% of the net taxable income from the sale. This rate decreases after the first year, but after 730 days of ownership, the tax no longer applies. This could influence your decision on how quickly to sell an investment property.
Increase in Capital Gains Inclusion Rate (Starting January 1, 2026)
The inclusion rate for capital gains will rise from 50% to 67% starting in 2026. This means that when you sell a property for a profit, a larger portion of the gain may be subject to taxation. As a property owner or investor, it’s important to plan for this increase and consider its long-term impact on your tax liabilities.
Change in Use Rules
If you decide to change the use of your property—such as turning your principal residence into a rental or business property, or vice versa—you may be considered to have sold the property, even if you haven’t physically sold it. This could trigger capital gains tax, depending on how long you’ve owned the property and its usage history.
If the property was your principal residence for some time, you can claim the principal residence exemption and pay no tax on the gain for the years you are able to designate it as your principal residence.
Additionally, there are elections you can make in the year the change of use occurs, which could allow you to postpone the change-in-use, and any potential tax implications, for up to 4 years. This can be helpful if you're planning to convert the property and don't want to trigger a capital gains event immediately, or if you plan to convert it back within those four years. Understanding these elections is key to managing your tax strategy.
Residential Real Property Deemed Supplies
GST/HST can apply in the following situations:
Self-Supply - When a builder constructs or significantly renovates a residential complex—whether it's a single-unit home, a condominium, or a multi-unit building—and then leases it to an individual for residential use, the builder is considered to have sold and repurchased the property at its fair market value upon the first rental. This also applies if the builder occupies one of the units as their own residence; in this case, they are similarly deemed to have sold and repurchased the property at fair market value. The self-supply rules require you to self-assess GST/HST on the property’s fair market value.
Change in Use - If a person converts non-residential real property into a residential complex without newly constructing or substantially renovating it, this conversion is considered a substantial renovation. Consequently, the person is treated as a builder who has substantially renovated the complex. This rule ensures that individuals converting used business or commercial properties into residential complexes for resale are subject to the same GST/HST rules as new constructions.
Conclusion
Understanding these key tax rules can help you navigate the complexities of real estate ownership and investment. Staying informed and planning ahead will ensure you make the most of your investment while complying with all necessary regulations. If you have questions about how these changes affect your specific situation, it's always a good idea to consult a tax professional.