House flipping is a completely legal activity. However, there are some rules you must follow; otherwise, the government could crack down. Do you know which ones?
House flipping is buying homes, renovating them, and then selling them in the hopes of making a profit. Like a cabinetmaker who buys a wooden dresser, restores it to its former glory and then resells it at a higher price. This is not an illegal act. However, for many years now, any person selling a secondary residence must declare the profit they earn.
But in 2016, Revenu Québec modified this rule. From now on, anyone who sells a home, even their main residence, must inform the government.
Must I Pay Tax on the Sale of My Primary Residence?
Despite this legislative change, a person does not have to pay tax on the profit generated by this sale. All he has to do is apply for the “principal residence exemption.” However, it’s a different story if you buy and sell frequently, in other words, if you flip real estate. In this case, the government could consider these transactions to be business activities, like revenue generated by a company.
Why Change the Rule?
House flipping can be done in two ways: the owner lives in the house during the renovations or, on the contrary, only goes there to do the work. Before the new rule (which requires that the sale of a primary residence be declared) was enacted, some were using the exemption to evade the government. They claimed, falsely, that the house they sold was their main residence. In this way, they could save on taxes. That is why every taxpayer now has to report their real estate sales each year, but some people have found ways to get around the system.
The Fake Nomad
One potential form of fraud is to mask house flips as simple moves. The person buys a home, renovates it quickly and sells it a few weeks later. Each time, the sold house is declared as the main place of residence, and therefore tax-free. The government is increasingly aware of this scam and investigates taxpayers who move repeatedly.
Inflated Price Fraud
Another frequent form of fraud is selling at a fake price. However, this one requires the seller’s complicity. The buyer suggests that the finale sale price of the home be inflated. Once the duo goes to the notary and the seller pockets the money (which is actually a bank loan), they give the surplus to the fraudster. Thus, the buyer has already acquired the profits from the future sale of the house to be flipped and will not declare the “real” profit when the time comes for them to resell the renovated property. To convince the original seller to go along with this plan, the wrongdoer usually offers him financial compensation.
Renovation Grant Fraud
Another way of misleading the government is to have the complicit seller sign a grant that would cover the costs of the renovations to be carried out on the property. Renovations that, of course, are false. The buyer pockets the money as a simple arrangement, when it’s in fact a way of earning a profit that’s not going to be reported.
Many Are Regretting It!
Although house flipping is completely legal, the fact remains that the government no longer views this activity in the same light, that is that it clearly recognizes that it is now a way of earning a living. Thus, house flipping fans are finding it less lucrative. Those who try to beat the system and practise it illegally may regret it. Penalties can be severe: as with any tax fraud, individuals must repay the amounts owing compounded with high interest rates. And don’t forget that a stain on the offender’s file will keep them on the revenue agency’s radar for years to come.
Despite all this, real estate flipping, when done legally, can be a great way to get rich, even if some proportion of the profit must be paid in tax.