• Property renovating as a business or profit-making activity

    Whether you are in the business of property renovating, property flipping or undertaking a profit-making activity in regards to property renovation, is a question of fact. The following information will help you work out if you are in a business or profit-making activity.

    Some of the questions you need to ask about your property renovating activities, are:

    • Are they regular and repetitive?
    • What is their size and scale?
    • Are they planned, organised and carried on in a business-like manner?
    • Are they carried on for the purpose of making a profit?
    • Do you rely on the income received to meet your and your dependants’ regular expenses?
    • Are they of a similar kind and carried on in a similar manner, to the activities of other property renovating businesses?

    In reaching a conclusion, no single factor is necessarily decisive and many may be interrelated with other factors. The importance given to each factor varies depending on individual circumstances.

    However, you are likely to be entering into a profit-making activity if you acquire a property with the intention of renovating and selling it at a profit, and go about it in a business-like way.

    Example: Renovation business

    Tony is a carpenter. After reading the Investors Club News, he decides to purchase a property. He thoroughly researches the real estate market, attends investment seminars and records the information he has found.

    The property Tony purchases is in a good location but he pays a reduced price because it needs extensive renovation. Using his knowledge and contacts within the building industry, Tony quickly completes the renovations.

    He then sells the property and makes a generous profit.

    Using the proceeds from the sale of the first property, Tony purchases two more houses that require renovation.

    Tony sets up an office in one of the rooms in his house. He has a computer and access to the internet so he can monitor the property market. Tony’s objective is to identify properties that will increase in value over a short time once he has improved them. He leaves his job so he can spend more time on his research and renovations.

    Tony’s activities show all the factors that would be expected from a person carrying on a business. His property renovating operation demonstrates a profit-making intention; and there is repetition and regularity to his activities. Tony’s activities are also organised in a business-like manner.

    Therefore, Tony is regarded as being in the business of property renovation.

    End of example

     

    Example: Renovation as a profit-making activity

    Fred and Sally are married with two children. They renovated their home, substantially increasing its value. After watching many of the home improvement shows and seeing how other people have bought, renovated and sold properties for a significant profit, they decide to investigate the purchase of another property to renovate and make a profit.

    They consider many properties, costing out the renovations, costs of buying and selling, and time frames to complete the renovations. Their research shows that they also could make a significant profit.

    They sell their current home and purchase a new property which they move into while completing the renovations. They plan out the renovation in stages, including the costs and any contractors needed to complete the work. The renovation runs to schedule and when completed they list the property for sale. The property sells for a profit.

    As the property renovation activities were planned, organised and carried on in a business-like manner; the purpose of buying the property was to renovate it and make a profit, and the renovations were carried on in a similar manner to other property renovation businesses.

    Therefore, Fred and Sally have entered into a one-off profit-making activity.

    End of example
      Last modified: 03 Aug 2017QC 18014