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.
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