Q: A buddy at work told me he flips houses and is practically guaranteed to make about $50,000 for each flip. I hardly make that much in a year, and I’d much rather make it in a few months. He told me to buy a house that needs renovation, live in it while it takes me a few months to fix it, then sell it and put all the money in my pocket without having to pay taxes because it my home is Is he pulling my leg or is that how it works?
A: There are some factors that you may not have considered with this real estate investment strategy that could put a damper on your preliminary plans.
First, let’s assume that you have the necessary cash for such a deal and are confident that the property will have appreciated in value by the time it is finally sold. You also need to accurately predict how much the renovation will cost and the timeframe in which it can be completed. (I find that most investors overestimate future resale value and underestimate the cost of Renos and the time required, both of which can easily eat up profits.)
More importantly, there are income tax ramifications that your co-worker hasn’t told you about. And the tax situation is soon to become much stricter – and more expensive. The federal government is becoming less permissive with this strategy turn around residential real estate. That is, buying a property with the intention of reversing and selling it in the near future, hoping to make a profit.
As per the changes proposed in the recent federal budget update, new “anti-flipping” rules will come into effect on January 1, 2023. Thereafter, anyone selling a property that has been held for less than 12 months (specifically 365 consecutive days) will be deemed to have had the house ‘turned over’ and any gains from the transaction will be taxed as business income. This means that the profit, less any associated costs, is fully taxable in the year of sale, just as if the seller had earned the money in some other occupation. The federal government sees this flipping strategy as a business venture and as such wants to tax profits like any other business.
Currently, the sale of a primary residence in Canada is not taxable under the Primary Residence Exemption (PRE). There are some requirements that must be met in order to qualify, such as: B. Actual living in the home for at least part of the year, but the government tries to maintain this tax-free policy for Canadians who want to use their “homes as homes.”
A private individual may purchase a property for rental purposes and report the rental income, which is taxable but may be offset by deductions for expenses such as mortgage interest, property taxes, insurance and management fees. Normally, when this secondary residence is sold, all gains are taxed as capital gains, ie 50 percent of the gain is tax-free and only the remaining 50 percent is taxed. However, if the property was not acquired with the intention of earning rental income, the new anti-flipping measure will make 100 per cent of the gains taxable.
The federal government allows certain exceptions to this taxation situation for life events such as death, a breakdown in a relationship, serious illness or disability, a change of job or insolvency/bankruptcy.
Care must be taken when flipping houses. If the Canada Revenue Agency (CRA) determines that you bought a property with the intent of a quick sale, you are 100 percent taxable on the gain. It does not qualify for the primary residence tax exemption, nor does it receive preferential tax treatment as a capital gain on the sale of a rental property. House Flipping Buyers – and Sellers – Beware!
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