Flipping real estate can be an exciting profession for anyone who is enthusiastic and loves challenges. It becomes thrilling, especially when one starts to earn big money on it. But with big money comes bigger taxes that have to be paid. If one is not careful with this, you will end up paying all your profits as taxes.
Principal Residence Exemption
Most of us are aware of this term and fell that selling houses could be tax free because of PRE. Before you get too zestful counting all the future money that you are going to make, let me tell you not every house you are going to buy will be called your principal residence.
This is the main problem, which will make you shell out a lot of money later as taxes if you are not careful.
Buying a property, renovating it and living in it for a bit does not make it qualify as your principal residence. Therefore, you can forget about trying to pass a property you bough and worked on as your principal residence.
Ways Around The Law
Though not every time but in some cases if you follow certain rules, you will be able to go tax free on some of the properties you sell. Here is a look at some of those:
- Hold On To the Property for an Year: If you hold on to a property for an year, it is called your primary property and may qualify as your main residence. This is not sure though as it always differs from case to case.
- Shift Into The House: To make everything sure, you will have to shift into the house and live there for two to three years to later sell it as your main residence.
- The Three Year Rule: Once you live in a property for three years, it does qualify as your principal residence. This was a common practice a well known Burnaby real estate agent, Eddie, preached.
You cannot have several principal residences and certainly cannot move every two to three years to a new house. If you are a businessman or businesswoman you will obviously want a fast turnaround of money without have to keep switching homes. The only option for you is to pay the taxes. The good part is that they have to be paid only on the profit and only after a certain amount of profit.
This differs from place to place and time to time.