Wednesday 17 April 2013


The evil of flipping houses and condos

The difference in the colours of the background has no significance in the text
Basically, there are two ways to flip houses and condos. The first is buying a property at a discounted or the original price and then selling it for a much higher amount. The second way is the flip-and-fix method, wherein undervalued houses in need of repair are renovated by the speculator. The speculator will spend his own money towards the repairs to the house and then sell it at a much higher cost. I can’t fault such a speculator for selling a house at a higher price if he had to renovate it first at his own expense and labour.

Why on the other hand do speculators buy new homes that don’t need repairs and then resell them at higher prices? They do it as a business venture. Unfortunately, when speculators flip a new house, they deny new homeowners wishing to buy a house that they really wanted at the original price listed on the market—a price that they could have afforded then but can no longer afford later as the new price that is presented to them by the speculator who bought the house first is beyond their means.
I know what you are thinking. Why didn’t the new homeowner buy the house before the speculator did? The answer is quite simple. They were looking at various homes before deciding that they wanted that particular house to live in whereas the speculator knew he wasn’t going to live in it so he bought it as soon as he saw it on the market since his sole intention was to flip it for a profit.

Flipping houses is a business fraught with risks even when investing in real estate on the basis of speculation. Flipping a new house can turn the speculator’s dream of a profit into smoke without thinking ahead of the pitfalls of flipping property. Flipping property without thinking ahead can be fatal to a speculator’s dream of making a profit. The flipper may have the capital but if he hasn’t looked in what the future holds for him, it is unlikely that he will succeed in his endeavor. For example, the prices of his house may drop below what the speculator originally paid for the house. This can even apply to speculators who did renovations on an older house.

Often time speculators over-estimate their selling price and underestimate their renovation and carrying costs and they often have ignored the costs at the time of the purchase such as legal’s, tax adjustments, appraisals, mortgage costs and title insurance. Mortgage and tax payments during the holding period could be substantial with an extra three-month buffer in case there are renovation delays or it doesn’t sell right away. 

As I said earlier in this piece, I will not fault anyone who buys a house that needs renovation even if he does it to make a profit. His actions are fraught with danger and he is justified in re-selling the house for a profit.

The speculator I condemn is the person who buys a brand new house simply so that he can flip it in order to make a profit from it at the expense of a new homeowner who really wants to live in it and pay the original price listed on the market.
The government of Canada intends to punish these kinds of speculators. Some sellers of new Toronto condos are now seeing their years of price speculation in a booming housing market being taxed away by the Canada Revenue Agency. (CRA) Its auditors have now added penalties to the property taxes for those who claimed that their houses and/or condos were their homes when in fact, they really didn’t live in them as their homes, or alternatively, they lived in them for a short period of time and supposedly changed their minds and sold the property to make a profit.

Finance Minister, Jim Flaherty wants the CRA to collect more than $500 million extra from suspected tax cheats this year alone. The auditors have applied a rare 50 per cent penalty for gross negligence, even on those who had never owned a house or condo previously.

The CRA is looking at real estate investments because of the recent condo boom for which it was discovered by the CRA as false non-reporting of taxable income and builder GST/HST housing rebates and capital gains/income in sales of real estate property.

The auditors are looking at such things as the seller’s intention, the type of property they sold, the frequency of purchase and sales, why they sold and how the purchase and sales fit with the person’s ordinary business.

Canada has three tiers of tax treatment for real estate sales—no tax on a principal residence, tax on half a gain from selling a recreational, rental or other investment property, and full taxation for making a business of buying and selling—known colloquially as flipping.

CRA Auditors are alleging that some sellers are making quick flips if the time between the registration of a house of condo and its sale is short. This is even though they may have bought the condo years previously, before construction started.

For example, if someone signed a purchase agreement 10 years ago to buy a condo, but then sold it the day after the condo was finally registered, the CRA would say that person sold the condo as a flip because that person officially owned it only for one day. The CRA doesn’t care that a person’s circumstances might have changed over the ten years, such that they don’t want to live in the condo anymore.  I am not convinced that is fair.

As an example, a man who was single bought a condo in downtown Toronto in 2005. By 2009 he was engaged, and his fiancée wanted to be closer to her work in Guelph. So, he sold it, soon after it was registered.

An auditor decided that the sale so soon after registration was suspicious, and so was the original choice of a two-bedroom apartment, the reason being that there was no reason for the man to purchase a two-bedroom condominium for only one person.

As a result, the man was assessed with over $100,000 of business income, resulting in a tax bill of roughly $50,000. He also faced a $25,000 penalty. The lawyer’s fee to take this to the Tax Court of Canada would be around $10,000 to $15,000.

Here is another case. A married chartered accountant waited five years for a new 935-square-foot condo unit to be built in Toronto. But she decided after living there 15 days in 2011 it was simply too cramped.

She and her husband changed their plans, kept their old family home, but claimed the condo as a principal residence for the time they owned it. (It is permissible to claim different homes as one’s principal residence, just not two at the same time.) A CRA auditor has ordered her to pay $72,000 of tax, and a $36,000 penalty, on a $150,000 price gain. I don’t see any grounds for an appeal.

The two last cases are examples as to what happens when people try to cheat on their taxes. Speculators who buy houses and condos so that they can flip them for a higher price better be living in them as their one and only permanent residence for a long time otherwise they will be facing large taxation costs coupled with large penalties.  

Speculation for the sake of profit at the expense of others has the same ideology of a cancer cell.

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