Property flipping is a popular and profitable way of investing in real estate, but it also comes with tax consequences. In this blog post, we will explain what property flipping is, how it is taxed in Canada, and the new rules that will apply starting in 2024.
What is property flipping?
Property flipping involves buying a residential property and reselling it in a short period of time to realize a profit. This also includes reselling the rights to purchase a property before its official sale. Property flipping can take on various forms and can involve different types of properties, such as:
Assignment flips: An assignment flip is when a buyer purchases a property and then assigns the contract to another buyer before the closing date. The second buyer completes the transaction and takes possession of the property.
Preconstruction home sales: Preconstruction home sales involve buying a property from a builder or developer before construction is complete and then selling it for a profit before or after the completion of the project.
Land flips: Land flipping involves buying a piece of land and then selling it quickly for a profit without making any improvements or changes to the property.
Buying a house, renovate, sell for a quick profit: This type of flip involves buying a house, renovating it, and then selling it for a profit. It typically involves buying a property below market value, making improvements to the property to increase its value, and then selling it for a higher price.
Wholesaling: Wholesaling involves buying a property below market value and then selling it quickly to another investor without making any improvements to the property.
How is property flipping taxed in Canada?
The tax implications of property flipping depend on the intention of the taxpayer when they bought the property. If the property was bought with the intention of reselling it for a profit, then the profit is considered business income and is fully taxable. This means that the entire profit is added to the taxpayer’s income and is subject to the marginal tax rate. For example, if the profit from the flip is $100,000 and the taxpayer’s marginal tax rate is 50%, then $50,000 goes to the government and the taxpayer is left with $50,000.
If the property was bought with the intention of holding it for a long term, then the profit is considered a capital gain and is only 50% taxable. This means that only half of the profit is added to the taxpayer’s income and is subject to the marginal tax rate. For example, if the profit from the sale is $100,000 and the taxpayer’s marginal tax rate is 50%, then $25,000 goes to the government and the taxpayer is left with $75,000.
Additionally, if the property was the taxpayer’s principal residence, then the profit is exempt from tax under the Principal Residence Exemption (PRE). This means that the taxpayer does not have to pay any tax on the profit from the sale of their primary home. However, the PRE only applies to one property per year and the taxpayer has to report the sale and the designation of the property as their principal residence on their tax return.
What are the new rules for property flipping in 2024?
Starting from January 1, 2024, the Canada Revenue Agency (CRA) will introduce a new deeming rule for residential property flipping. The new rule will assume that any property that is sold within 365 days of purchase is a flipped property and the profit will be taxed as business income. This means that the profit will be fully taxable and the PRE will not be available to reduce the tax. The new rule will only apply to gains; individuals cannot report a business loss on a property just because it meets the definition of a flipped property.
New Tax Rules on Property Flipping may not apply in some conditions:
The new rule will also have some exclusions for certain life events that may cause the taxpayer to sell their property within a year of purchase. These life events include:
The death of the taxpayer or a person related to the taxpayer.
A related person joining the taxpayer’s household or the taxpayer joining a related person’s household (e.g., birth of a child, adoption, care of an elderly parent).
The breakdown of a marriage or common-law partnership of the taxpayer, where the taxpayer has been living separate and apart from their spouse or common-law partner for at least 90 days before the disposition.
A threat to the personal safety of the taxpayer or a related person (e.g., the threat of domestic violence).
The taxpayer or a related person is suffering from a serious disability or illness.
An involuntary termination of the employment of the taxpayer or the taxpayer’s spouse or common-law partner.
An eligible relocation of the taxpayer or the taxpayer’s spouse or common-law partner (e.g., generally, a relocation that enables the taxpayer to carry on business, be employed, or attend full-time post-secondary education).
The insolvency of the taxpayer (e.g., due to an accumulation of debts).
The destruction or expropriation of the property (e.g., where the property is destroyed due to a natural or man-made disaster).
If the taxpayer can prove that the sale of their property within a year of purchase was due to one of these life events, then the new rule will not apply and the profit will be taxed according to the taxpayer’s original intention.
Conclusion
Property flipping is a lucrative but risky way of investing in real estate. It is important to understand the tax implications of property flipping and to plan accordingly. The new rule that will take effect in 2024 will make property flipping more costly and less attractive for many investors. However, there are still some exceptions and opportunities for those who are willing to take on the challenge.
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