Flipping Out

With the steady rise of housing prices throughout the Greater Toronto Area (GTA) many individuals have looked to “house flipping” as a way of generating income. “Flippers” generally speaking, are investors that purchase a property—sometimes a fix-er-upper—and then sell it for a profit shortly thereafter. At first glance house flipping appears to be a very profitable undertaking for those with the funds, the tools and the ability to do it. But it’s helpful to fully explore the true cost of flipping before diving in.

Taxes

The government of Canada generally considers profits generated from flipping houses as fully taxable income.1 This includes selling a property before its construction is completed and then assigning the right-to-sell clause that is in the contract to another speculator or the final buyer (also known as shadow flipping). Furthermore these real estate transactions may be subject to GST/HST for which the buyer or seller is responsible to remit to the Canada Revenue Agency (CRA). Before jumping into a flip, it’s good idea to first consult with an accountant and prepare appropriately for any and all taxes that may have to be paid.

There is an important tax exemption for buyers that will live in the property that they are purchasing, otherwise know as the “principal residence exemption”. A taxpayer can designate only one property as his or her principal residence for a particular tax year and will not pay any taxes when they sell their principal residence.?As a result of this exemption many renovators and investors (ie. flippers) have taken the additional step of moving into the property they plan to flip in order to qualify and avoid paying tax. However in recent years the rapid rise in real estate transactions combined with a housing shortage has led to increased government scrutiny and action against those entering the real estate market for the purpose of flipping for profit. Between 2015-2021 in Ontario alone CRA audits related to real estate activities resulted in nearly one billion dollars in audit assessments.2? Even when planning to reside in the property that is being flipped, it’s wise to consider potential tax implications - just in case.

Cost of Doing Business

When reviewing sale prices in your “flipping” neighborhood it’s important to consider all the expenses that are tied to those sales. Many, if not most, of the “sold” properties achieved their sale only after expensing real estate commissions, legal fees, cleaning and decluttering services and staging costs among other expenses. In?Ontario there are also Land Transfer Taxes levied by the municipal and/or provincial government to consider. Additionally there are the carrying costs of managing the property before putting it back up for resale. These may include mortgage payments, utilities and property taxes on top of everyday maintenance. Added together these expenses can greatly impact the profitability of a flip.

Appreciation

For those that choose to fully renovate before re-selling their property it’s worth considering if renovating generates significant profits above and beyond the market appreciation that occurs during renovation period. And if so, how much more?

Analyzing the before and after sold prices of “flips” in your neighborhood?and then calculating the market appreciation between the sale periods is a helpful exercise to determine how worthwhile a full blown renovation actually is. You may discover that renovation doesn’t always provide an attractive return on investment (ROI) and much of the profit is generated from general market growth. The Home Price Index (HPI), a statistical?report providing benchmark prices by home type and neighourhood, is released by the Toronto Regional Real Estate Board (TRREB) each month and is a great resource to gauge home value changes over time. Your professional Realtor can access this monthly report through their TRREB membership and provide you with the numbers you need to make an informed decision. In my personal experience it has been an essential tool for comparing monthly market values by home type and neighborhood.

Go Long

When a quick flip just doesn’t add up an alternative option might be to buy, lease and hold onto the property being purchased. Real estate has consistently been a great way to invest funds over a long-term period. And renting out the property will generate a revenue stream that may cover most or all of the monthly expenses and will be subject a capital gains tax (rather than an income tax)—which is levied against 50% of the profits. However taking on the responsibilities of a landlord does require some additional research (and time) and might not be for everyone.

1.Canada.ca?“Flipping Houses or Condos? Know Your Tax Obligations!

2. Canada.ca “How the CRA addresses non-compliance in the Real Estate sector”.

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