Property Flipping? Know Your Tax Obligations!

What is property flipping?

Property flipping is when individuals, including real estate agents, buy and resell homes in a short period of time for a profit. This also includes buying and selling a property before its official sale or construction—a process called an “assignment sale” but sometimes also referred to as “shadow flipping”.

There are three main categories of people engaged in this:

Professional contractors or renovators – They rapidly buy and sell real estate at a profit (sometimes demolishing or renovating the property).

Speculators or middle investors – They buy a property and then, for a profit, assign the right-to-sell clause that is in the contract to another speculator or the final buyer. This is called “shadow flipping”. It can occur many times between the first sale and the final sale of a property. The original seller often does not know that their property has been assigned to another buyer until the signing date.

Individual renovators – They buy real estate, renovate it, live in it for a short time, and sell it so they can claim the principal residence exemption several times in their lifetimes.

Tax obligations related to property flipping:

The CRA acquires and analyzes third-party data and has found that some flips are not being reported or are being reported incorrectly. The profits from flipping real estate are generally considered to be fully taxable as business income. The facts of each case determine whether such profits should be reported as business income or as a capital gain.

You must report the money you make on all real estate transactions, including flips and assignment sales (of both pre-construction and resale homes), to the Canada Revenue Agency (CRA).

This could also include fees or commissions generated on these transactions.

Know your tax obligations:

• The profits you make from flipping real estate are generally considered to be fully taxable as business income.
• The principal residence exemption does not apply to property flipping.
• These transactions may also be subject to GST/HST which you would be responsible for remitting to the CRA.

The CRA is taking action to address non-compliance in the real estate sector, and to ensure that the principal residence tax exemption is claimed only by those who are eligible for it.

If you have any questions or concerns about whether you are in compliance contact The lions Accounting Group Ltd., Chartered Professional Accountants at 604 926 3522.