The Truth Behind Flipping Homes

If you are making income from flipping houses, you should be aware of potential taxes placed upon your profits. Whereas real estate profits are taxed as a capital gains tax at a fifty percent rate, business profits from flipping real estate are subject to a 100 percent tax on the profits. Is there really a difference? Let’s take a closer look at the following case.

Recently, a taxpayer was involved in a Tax Court case over CRA reassessments concerning six real estate properties. Her total profit from these sales was over $100,000, which she reported as capital gains for her taxes. The CRA disagreed with her claim and required this woman to report 100 percent of her profits as taxable. In court, the taxpayer stated that she bought the properties as rental income for her retirement. However, five of the six homes were sold after only nine months. This trend showed that she really wanted to flip the homes for immediate income rather than collect rental income over the long term. In the end, the Tax Court decided that the profits from these real estate sales should be identified as business income at the 100 percent tax rate.

Even though the Tax Act does not identify specifically whether money earned from real estate sales should be taxed as a capital gain or business income, there are certain factors that the CRA takes into consideration. These are:

• The intended use of the acquired property

• The length of time the property is owned

• The nature of the real estate sale

• The improvements made to the property

• The number of real estate transactions made

• The frequency of real estate sales

• The final sale of the property

The lesson to be learned here is that flipping homes is considered a business and the CRA will tax the profits at the higher 100 percent tax rate.