Investors beware as CRA puts flippers under the gun

Posted by on Wednesday, March 15th, 2017 at 12:51pm.

  

Purchasing a fixer-upper in a first-class neighbourhood is a long-standing practice and any profits to be had have been under the radar.

Until now.

Canada Revenue Agency is now paying close attention to investors and contractors in the house flipping industry.  Those who buy low, renovate and put a home back on the market with a very short turn around time. 

It’s something that home buyers have been concerned about for some time.  Purchasing a freshly renovated home especially when it’s located in a premium property is a wonderful thing but often renovations are shoddy and rushed.  Poor workmanship and cover ups abound and buying a flip is certainly a buyer-beware proposition.

What the CRA is doing

Canadian Real Estate Wealth Magazine reports that starting with the 2017 tax year, the CRA will provide an additional section on tax returns on Schedule 3.  This schedule is where individuals must report Capital Gains, or Losses as the case may be.  This is where home owners who have sold a property in this tax year must state whether it’s a principal residence, in which no tax has to be paid on any money made over and above the purchase price, or whether it’s a second property.  On Schedule 3, the date that the homeowner purchased the residence must be reported, the municipal address of the property and any other bits of information that would indicate that the home sold was a principal residence.

The federal government has claimed that the additional information required on Schedule 3 is because the CRA wants to make improvements to the compliance and administration of the current Canadian tax system.

The changes were announced last October and many in the real estate industry are speculating that the new information requirements are actually a way to track home flippers who try to beat the system and avoid capital gains by reporting flipped properties as principal residences.

The feds hope that by getting this addition information, the government will gain a better understanding of how prevalent this practise is in the country and how it is possibly affecting real estate prices in Canada as it’s in a current battle to reduce inflated prices in some of the country’s major centres.

Last year in Edmonton purchasing a house to flip was likely not as lucrative as in year’s past.  Real estate often lags behind the economy, so as 2017 looks to be a year of recovery, home prices may not rebound as quickly. 

If you’re thinking of flipping a home, you’ll need to add tax considerations onto this list of things to watch out for:

  • Getting a Mortgage:  Being less than truthful on a mortgage application is fraud, pure and simple and can land you in jail.
  • Paying Too Much:  Even when you do the math and a profit seems to be a sure thing, don’t pay more than you need to or get into a bidding war because the potential of a property is crazy good.
  • Cash Cushion:  If you have barely enough cash to make a quick reno a reality, think again.  Cost overages lead to desperation which can make you do something stupid.  Haste makes waste and worse.  Make a budget and add another 20%, just in case.
  • Keep Your Day Job:  You may need another source of cash should your new investment turn into a money pit.
  • Hire Good Guys:  Licensed contractors will help mitigate risk and ensure a much better job that your friend from high school’s uncle.
  • Don’t Load Up on Properties:  Unless you have a big company with lots of help, flip one house at a time otherwise the bank will end up owning your investments.
  • Use a Good Real Estate Agent:  A good agent has access to good properties in need of some TLC in some pretty fantastic neighbourhoods.  Develop a relationship with a REALTOR and they’ll help you put money in your pocket.  

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