“Flipping houses” is something we’ve all heard about, and although we may not know exactly what it entails, our government sure does! Let’s take a closer look at what flipping homes is all about and how the government is trying to make it less worthwhile for contractors and speculators to take part in home flips around the country.
The easiest way to categorize a home that has been “flipped” is a property that was recently purchased, renovated, and resold to make a profit. Seems pretty straight forward right? Essentially, Someone who is familiar with renovations, contracting and project management buys a home at $450,000 in a neighbourhood that is usually worth $700,000, they renovate it for figuratively $100,000 and sell them at $700,000. All in all the contractor makes a $100,000 profit in under 1 year. As it stands right now the “home flipper” would be taxed at the capital gain rate of 50% of his profits ($100,000 – 50% = $50,000 added to his tax bracket, while the other $50,000 is tax free!)
What is the Anti-Flip Tax?
Starting in January 2023, the government wants to make the full 100% of profits from the sale of a “flip” taxable, meaning the contractor or home flipper would be taxed on his full profits instead of only 50%. This would help discourage contractors and speculators from purchasing property with the intention of making quick profits and inflating home values in certain areas. Why are they imposing such rules and regulations? The government believes that home flipping is a big part of the inflated home prices that we saw around the country from 2019 – 2022 and wants to stop speculators from investing in real estate for the sole purpose of quick resale for big profits. Flips would remain legal transactions and the government would not be able to stop contractors or home speculators from taking on projects, but once the full 100% of profits become taxable, the work and profit margins become thinner and seem less worthwhile to those taking part in the “home flipping” markets.
The truth is, no matter how many rules and regulations the government puts in place, there is always a loophole that will be found and the so called “speculators” will find their way to pay less taxes than the government would like them to. As a realtor on the field in many different neighbourhoods, although “flips” and “major renovation projects” or new builds have become increasingly popular in urban and suburban neighbourhoods, I do not agree that the inflation of prices was caused by home flippers or speculators.
The truth is, prices increased because purchasing a home became extremely affordable with low interest rates, and the lack of inventory caused buyers to over pay or buy with their hearts instead of their heads (supply and demand basics).
Will this new law stop speculators from purchasing property in the city and re-selling for a profit? or will they simply find a loophole and continue to benefit from their knowledge and expertise? Let us know what you think by reaching out through email, phone or text message!