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Rules around 'tainting'

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  • Rules around 'tainting'

    Hi, I have a question about structure of ownership.
    Let's say you have a company that owns 2 rental properties and will own them for 10+ years.
    If the same company buys another rental property with the intention to hold on to it for at least 5 years, but then after 1 year gets an excellent offer to purchase the property from the tenants living in it, then I'm assuming the brightline test means that tax would have to be paid on that sale.
    But, does that then mean that the company from that point onwards would be regarded as 'trading in property' and have to pay tax on every sale from that point onwards?
    I ask because my lawyer has no idea.

  • #2
    Chuckee, this is a question for a property accountant - like PT user AnthonyCat.

    Logic would say you're intention has stood the test of time - i.e. you're a buy and hold investor. However if you made a habit of buying and selling within the current 5 year brightline rule then the 'goodwill' you've earned as a hold investor may be replaced with that of 'trader'.

    Just my layperson's thoughts.

    I've done a search on GRA's website for tainting and got these results - you may find your answer in here.

    cheers,

    Donna

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    • #3
      Hi! Sorry for the late response, I don't check PropertyTalk as often as I used to now the forum is less active.

      No, in the instance you have described above there is no tainting issue. You're correct that Bright Line would apply.

      You're also misunderstanding the rather complex nature of tainting - even if you were tainted by this property transaction it would not effect the existing properties you owned, nor any others purchased in future after the period of property trading ended.
      AAT Accounting Services - Property Specialist - [email protected]
      Fixed price fees and quick knowledgeable service for property investors & traders!

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      • #4
        Hi Chuckee,

        Why not look at the situation in a different way.

        1) If you buy a good rental now. It's got good cashflow and good opportunity to add value. If your aim is to buy long term rental properties to build your long term passive income, why would you want to sell? Yes a good offer, but how much are you going to lose selling now, compared to holding for the next 20 years?

        What if interest rates get lower and lower, do you really want to sell now? But even if they don't, does it really make sense to sell now?

        2) If you were forced to sell that is different. But again you would look at this different. Why sell the new property that is subject to Brightline rules. Why not sell one of your properties that you have held for 10 years, that are not subject to tax?


        NOTE - pretty much every property is getting excellent offers at the moment, so if you are attracted by the great values, why not sell the older 2 as well? Or are you just excited because you might save $20k in commission through an easy sale to tenants? If so note, that an alternative view might be that you might get $50k to $100k more if sold through an agent!

        Ross
        Book a free chat here
        Ross Barnett - Property Accountant

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        • #5
          Thanks for the help everyone!

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