What Does This New Tax Entail?
As of January 1, owners reselling a real estate asset (including condos and other rental buildings) within less than one year of purchase will be considered to have earned a business income. The profit generated will therefore be 100% taxable, instead of the previous 50% rate applicable to capital gains. To reduce the tax rate back down to 50%, house flippers will have to hold on to the property for more than 12 months before listing it. It is equally no longer possible to circumvent the law by designating the flip as the principal residence.
Why Was It Created?
This new law’s intent is its most notable feature. It states that if buyers have purchased a property with the intention of reselling it, they will have to pay tax on the total profit earned.
Despite being a completely legal practice, real estate flipping is criticized for many reasons: the acquisition and quick resale of homes contribute to price inflation in the real estate market—mainly for first-time buyers—as well as in the rental market. This means that housing is increasingly expensive. It has been observed that in the overheated real estate market the sale price of a house or multiplex jumps by 30% to 40% if it is being relisted following a flip. Furthermore, if you are purchasing a flipped property, don’t skip the pre-purchase inspection. Even if the residence has just been renovated, better safe than sorry!
Are There Exceptions?
This new real estate tax legislation is strict; however, those who still wish to flip houses or condos can choose to wait thirteen months before putting the property back on the market—not a major inconvenience. Moreover, an exception is allowed for specific life events: death, birth or adoption of a child, separation, inability to pay, illness, a move over 40 km away for a new job, etc. In short, the law aims to curb flipping for profit, not financially hinder legitimate recent homeowners from divesting themselves of a residence that no longer meets their needs.