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Investment Property - How to define it

With the increase of buy to let properties and the hype in the property investing market, often an investment property is confused with a simple property trade deal or speculation.

Purchasing a property that is not a primary dwelling or holiday home, can be generalized in 3 main categories:

  1. Resale – For the purpose of selling for profit (often called a “flip”)
  2. Fix / Renovate - For the purpose of renovating and reselling for profit (often called a property trade).
  3. Letting – For the purpose of letting to a tenant and generating income for the long term (often called buy to let property).
Those are the major categories. However, not all of them are investment properties.

In the first case, when one buys a property to resell, it would be considered a speculation or a trade. In terms of income, on a short term deal of reselling a property, even the tax man will ask for income tax instead of capital gains tax (CGT). Therefore, it is not an investment property, it is simply a trade and the property is “stock” just like apples and pears that are sold at the market.

 

Often any property purchased is viewed as an asset and therefore called an investment property, and often people may call themselves property investors because they trade buy to let properties. That is true in the wide sense of a discussion. However, a property for investment is not any property purchased just because it is viewed as an asset.

In the second case, when one finds a property that needs renovations, fixes the property and then resells the property, it is also a trade. The holding period is short term and the tax man again will ask for income tax not CGT. Therefore, this category is also not an investment property but rather a trade. The renovations option varies significantly in strategy from the speculation, as in this case the “stock” which is the property was bought at low value, increased in value by the renovations and sold for its new value. In a speculation the speculator only waits for a period of time for the market to move up in price, and resells without doing anything to the property to increase the value.

In the third case, when one buys a property to let the property to tenants for the long term and earns income from it – it is an investment property.

This is where the confusion occurs. 

The speculator often does rent out the property to tenants, to reduce the mortgage bond payments, (often called shortfalls). The letting out of a property for the short term to resell later for profit confuses the term investment property with speculating and trading. Many buy to let properties are call investments just because they have tenants temporarily.

Just because the property is let to a tenant for a period of time, this does not make the property an investment property. The long term holding of the property will determine if the property was bought for investment or only for speculating and stock trading.

The last resource of clarification is SARS. Every sale of property has to attract some tax, either CGT or income tax. SARS guidelines make this issue very clear.

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Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved.





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