The government’s efforts to further cool down an overheated housing market and make homes more affordable are poised to take a dent out of house flippers’ profits.
New residential property flipping rules will have people paying taxes on properties they’ve owned for less than 12 months as business income. This recent change applies to properties on or after January 1, 2023.
However, only some think the changes are a terrible thing. Jonathan Alphonso, Marketing Manager at Mortgage Broker Store, is one of the experts in the industry who sees the changes in a positive light.
“I like the idea behind these new rules, and I think it’ll be one tool to help cool Ontario’s housing market,” he says. “Buying and selling houses is a core part of our business, and while this may reduce our profitability, I believe it will lead to a healthier market.“
Different Newer Rules
These newer rules have different designations from previous ones, which had the sale of a residential property qualify as a residence with an exemption. A capital gain was 50% taxable or a fully taxable business income sale. Alphonso sees them as having a minor effect on the private mortgage industry.
He states that most short-term real estate investors use low-rate credit lines and have mortgages with banks instead of using higher-rate private financing.
“Private lenders are far more sensitive to falling house prices, which seems to be the current environment in 2024,” he says. “ Right now, private lenders are very hesitant to lend and will likely continue to be so until the housing market trends upward.”
The definition of a flipped property under the new rules includes properties in Canada and those that would not otherwise be on a taxpayer’s inventory. They must be owned for less than 365 consecutive days before the sale.
Alphonso highlights that these changes will affect another group in the real estate industry more than others.
“Cash home buyers are the most impacted group by these new rules. They can result in tens of thousands in additional tax expenses for most Ontario properties. These new costs are reflected in lower average cash offers for homes. Cash buyers who only relied on doing quick flips will most likely stop sending offers.”
Cash Home Buyers Holding Investments
He also says that many of the cash buyers he knows of, including his company, plan on holding investment properties for up to a year before selling. It’s a strategy that limits how many properties they can buy and leaves some vulnerable to market changes, he says.
A few exemptions from the new changes include the taxpayer’s death or the death of a person related to them. Others include:
- One or more people related to the taxpayer becoming a member of the household the taxpayer owns.
- A marriage breakdown, or a split in a joint law partnership under certain circumstances.
- Eligible relocations of a taxpayer or their spouse or common-law partner.
- Involuntary termination of employment for the taxpayer or their spouse or common-law partner.
House flippers must be aware of the penalty for not reporting gains on the property sale. They include a gross-negligent penalty of 50% of the additional tax owed plus interest.
Alphonso has a few final thoughts.
“Anyone thinking about making money in real estate needs to make sure they fully understand the implications of these rules as well as all other costs involved in closing.”
He says the costs are generally high in Ontario and can catch people off guard before offering a final tip.
“People reaching out to cash buyers should temper their expectations. Due in part to these rule changes, any offer they get will be far below market value.”
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Email ron@mortgagebrokerstore.com or call 416-499-2122
