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Recent changes to mortgage rules have caused the housing market to cool slightly. What was once a highly lucrative industry, has turned into a mess for some but this isn’t to say that it can’t still be profitable for those who play their cards right. It’s important to fully understand the tax laws surrounding flipping houses if you want to try and make a go of it.
There is a fine line between tax-free profits and business income. The closer your business is to commercial real estate transactions (for example, if you are a broker or builder), then chances are the money you receive from the sale of a house would not qualify for the principal residence exemption and it would be considered business income rather than capital gain.
CRA looks at a few things when it comes to whether you qualify for the principal residence exemption when selling a home. If you buy and sell too often, you may be disallowed for this exemption which would mean that the money you receive could be 100% taxable.
So what are the criteria CRA uses? It’s usually on a case-by-case basis, but here are a few good questions to ask yourself:
- What is your intent with respect to the purchase of the real estate?
- What is the feasibility of your intent?
- Where is the real estate acquired and what is the zoned use?
- Do you have evidence that your intent changed after the purchase?
- What is the nature of your business/profession/calling/trade?
- Did you borrow money to finance the acquisition and what are the terms?
- How long did you hold the property?
- What was the motivation behind the sale of the property?
- What is your history in relation to real estate?
These questions can be difficult to answer but are necessary in determining if you even qualify for the principal residence exemption. If you are thinking of getting into the house flipping business, we strongly suggest booking an appointment to come and talk to us about the tax implications not to mention how to structure your business from a financial standpoint. We can help with all the processes along the way from creating a corporation, setting up your books, your bookkeeping, accounts payable, payroll (if needed), and taxes. Keep this important tax fact in mind – All principal residence dispositions, whether tax exempt or not, must be reported on your personal tax return.
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