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.

Often any property purchased is viewed as an asset and therefore called an investment property. 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.

Purchasing a property that is not a primary dwelling or holiday home, can be generalised into three main categories: the resale property; the fixer upper and the buy-to-let property — but not all of these are investment properties.

The 'resale' property

Resale is bought for the purpose of selling for profit (often called a “flip”).

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.

The fixer upper

This is a property bought for the purpose of renovating and reselling for profit (often called a property trade).

In this 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.

The buy-to-let property

In the third case the property is bought for the purpose of letting to a tenant and generating income for the long term (often called buy-to-let property).

When one buys a property to let the property to tenants for the long term and earns income from it, it’s an investment property. But this is often 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.

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.

This information is provided by The Property Investor Network.