What Are The Tax Implications with Flipping a House?
Flipping a house can be a great way to make money in real estate. However, unless a property is considered your primary residence, you’ll have to pay tax on this money, which can seriously cut into your profits. Depending on how you are flipping houses can impact the type of taxes that you owe and you want to make sure that you account for the correct amount.
Firstly as I mentioned before if the house that you are selling is your primary residence then you will not have to pay taxes on the profit of the sale. There are lots of flippers who have been using the primary residence exemption as a loophole to avoid taxes. They buy a house move into it, renovate it and then sell and buy another home right away. These tend to be people who are doing flipping as a secondary income, not their full-time job. However, the CRA is starting to crack down on this. So you have to be careful. If you are doing this too often it could result in you getting audited.
For any other type of property, you are selling you will be required to either pay business taxes or capital gains taxes. So what the difference?
Well with capital gains only 50% of your profits are tax applicable whereas business taxes apply to your entire profit.
When selling a secondary property such as a vacation home, or income generating investment property you will pay capital gains tax. Many flippers make the mistake of automatically assuming that since they are selling a real estate asset that their profit will be considered a capital gain and therefore they will only be taxed on 50% of it.
However, if you are purchasing a house with the intent of fixing it up and selling it for a profit then the CRA will consider that a business income and you will have to pay business taxes on your profits. This means that that the entire profit will be added to your yearly income and taxed at your applicable tax bracket.
Now it is hard for the CRA to prove what your intent for the property was so there are several different factors that they will look at to determine whether your profit should be considered as a capital gain compared to a business income such as:
1) How many renovations where done?
2) How long you owned the home?
3) What your occupations is? If you are a contractor you will have more difficulty getting away with claiming a capital gain.
4) How frequently you buy and sell houses?
5) How much money did you borrow to purchase the home?
When flipping houses it is very important to make sure that you have a good accountant to help you structure your flipping business in a way that you can save on taxes.