If you plan on buying and flipping your home for profit, you may want to think twice.
The intent behind the new anti-flipping tax measure is to slow the rising property costs and make homeownership more affordable for potential buyers. As of January 1, 2023, if you sell a residential or rental property you’ve held for less than a year, your profits will be taxed as business income.
In this post, we’ll explain why the anti-flipping tax exists, how it impacts house flippers and homeowners, and who’s exempt from this new law.
What is House Flipping?
Before we dive in, let’s clarify what house flipping is. According to BiggerPockets, “House flipping is a form of real estate investing where you buy a property, improve it, and then quickly sell it for a profit.”
For example, let’s say you buy a property for $500,000, but instead of calling it home, you spend $40,000 on renovations to increase its value. Then, a few months later, you resell the property for $700,000. For just a few months of work, your profit will be $160,000, minus the closing costs and capital gains. That’s basically how house flipping works.
Why the New Anti-Flipping Tax Exists
House flipping impacts more than just the flipper. The good news is that you made a profit by converting a $500,000 house into a $700,000 home. The bad news is that you’re not the only one doing it. Even though this is a made-up example, houses usually take much longer than mere months to substantially increase in value.
While house flipping in Canada isn’t the only reason housing prices are rising, the Federal Government believes it’s an attributing factor. The Federal Government strives to reduce speculative demand in high-value markets like Vancouver by enforcing an anti-flipping tax.
Real estate speculation occurs when housing is treated like a market investment instead of an opportunity to house people. It often leads to:
- Skyrocketing housing costs
- Predatory landlord practices
- Poorer building management
- Increased eviction and vacancy rates
As Vancouver residents and neighbors have undoubtedly noticed, real estate is getting pretty expensive. Canadian homes have seen an average increase of 375% from 1996 – 2021. Homes worth $200,000 then are worth $750,000 now, and many Vancouver residences have experienced even more dramatic increases. While the anti-flipping tax probably won’t prevent the adverse impacts of speculations and stop homes from increasing in value, it could slow these processes.
How Will the Anti-Flipping Tax Impact Homeowners?
If you’ve owned a home for longer than 12 months, or you’re a new homeowner with no intention of selling within a year of buying, this tax won’t impact you. The intent behind the law is to improve long-term homeownership rates, not to punish those who already own.
However, if you are in the house-flipping business, this law can substantially cut into your profits.
Before this tax came into being, if you were to sell a residential property that you either used personally or to generate rental income, the profits would be considered capital gains. However, if the property was also considered your primary residence, you can claim the primary residence exemption and avoid paying taxes on any of your gains. If it’s not your primary residence and you’re ineligible for the exemption, only 50% of the profits from your sale would be subject to taxation.
Returning to our earlier example, if you bought your home for $500,000, sold it for $700,000, and qualified for the primary residence exemption, you can avoid paying a capital gains tax. If you don’t qualify for the exemption, you would have to pay capital gains tax on half of your profit. In other words, out of your $200,000 profit, you would have to pay taxes on $100,000 of it.
The only way your sale would be fully taxed as business income is if the Canada Revenue Agency (CRA) could prove one of two things:
- The home you sold was not your principal residence
- Your main intention when acquiring the property was to flip it and turn a profit
With the anti-flipping tax now in effect, the CRA no longer has to prove either of these things. If you buy a home and then resell it within 12 months, it’s considered business income, and you’ll have to pay capital gains for the full 100% or all $200,000 of your profit.
Exceptions to the Anti-Flipping Rules
As with all rules, there are some exceptions. You can avoid having to pay the anti-flipping tax if you sell your residential property within 12 months due to one of the following:
- A new addition to your household (e.g., birth, adoption, a parent moves in)
- Divorce or dissolution of common-law partnership
- Serious illness or disability of a resident
- Death of a resident
- You relocate for work*
- Involuntary termination of employment
- Involuntary disposition (e.g., a natural disaster)
- Your personal safety is threatened
*If you’re relocated for work, your new home must be at least 40 kilometers closer to your new work location.
If you sell your residence within twelve months of buying, make sure you get the proper documentation to prove that you qualify for one of these exceptions. The burden of proof will be on you, not the CRA.
Will You Be Affected by the New Anti-Flipping Rules?
Vancouver is consistently ranked as one of the world’s most livable and cleanest cities. Each of our vibrant neighborhoods has a unique blend of cultures and vibes, and there’s always something fun and different going on. It’s no wonder why the homes for sale are increasing in value.
Hopefully, this anti-flipping tax will help make buying homes in Vancouver more affordable for those who wish to live here. If you’re one of them or are concerned that the new anti-flipping rules will affect you, send us a message! We’re always here to chat.