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The Anti-Flip Tax: 4 Things You Should Know
“Flipping a house” means buying one at a low price, then renovating it to resell it for much more over a short period of time. This real estate move won't be so easy in 2023. Indeed, as of January 1, 2023, an anti-flip tax will perhaps curb the enthusiasm of flippers who were hoping to make a substantial profit without it being fully taxed.
1. Description
This new tax stipulates that a person who sells real estate (including rental property) that they have owned for less than one year would be considered to have business income. This means that the realized profit would be 100% taxable and would not qualify for the 50% capital gains rate or the principal residence exception. Only the length of ownership will be considered as a tax factor.
2. New Extension
In November 2022, the tax was even extended to sales contract dispositions made within a period of less than one year. Also, the 12-month holding period will be reset after the taxpayer takes possession of the property, preventing them from escaping the rule because they had the right to purchase the property prior to its construction.
3. Purpose of the Tax
Although quick resales - also known as flips - are a legal transaction, the practice remains highly criticized. Some allege that they were contributing to the housing crisis and overbidding. The Canada Mortgage and Housing Corporation (CMHC) says that in Montreal, for example, competition among households to buy a house or condo is putting pressure on sale prices. There may also be an increase in rental prices when the flip is on income properties. As a result, affordability, and the ability to afford housing are at stake.
Intensifying this overheated market, it is not uncommon to see that the prices of houses and multi-family units resulting from flips were inflated by 30 to 40% between purchase and resale… and this, in less than twelve months.Also, some describe defects that can be hidden at the time of the resale, hence the importance, if you are buying a flipped home, to have your home properly inspected … even if it may have recently been!
4. Exceptions and Workarounds
Even though this change in real estate taxation is stricter, there are ways to get around the rule. Flippers could wait 13 months before reselling their property. Also, the rule will not apply if the sale is due to specific life events: death, birth/adoption of a child, separation, personal security, disability, or illness, moving to a new home at least 40 km closer to the new job, insolvency, personal security, involuntary disposition (fire) or natural disaster.
The anti-flip tax alone will not solve the housing crisis alone, but it will help to slow down the overheated housing market.
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