If you are in the business of flipping houses for profit in Ontario, or thinking about getting into it, there are some things to consider from a tax perspective before you venture out.
Flipping houses as a business is when a property is purchased, renovated and sold with the intent of earning a profit. In this situation the tax treatment is different to that of a property that is generating rental income. The main difference is that when a property that was intended for generating rental income is sold, there is a Capital Gain or Capital Loss. However when the business intention is to purchase, renovate and later sell a property for income, this is considered revenue and not a Capital Gain or Capital Loss.
This becomes more complex when the property, say a building with many rental units is being renovated with the intent to sell it for a profit while a tenant is residing there. It is best to have the Canada Revenue Agency make a ruling as to how to treat such a specific situation in terms of tax treatment. This is done on a case by case issue, there is no general way of tax treatment.
If you have a unique situation, it is best to consult on your options from a tax treatment perspective before you begin.
Flipping a House for a Profit is Treated as a Business
Here is a quick breakdown of some of the terminology used when flipping a house for profit is being treated as a business.
Revenue: Is the difference between the purchase of the property and the sale of the property after renovating it. Revenue is not the same as Capital Gain.
Cost of Goods: This is the direct cost of renovating the property, including all materials, electrical work, drywall etc.
Gross Profit: Revenue less the Cost of Goods.
Net Profit Before Taxes: Gross profit less expenses.
List of Expenses:
- Meals & Entertainment
- Bad Debts
- Interest & Bank Charges
- Business Taxes, Licenses & Memberships
- Office Expenses
- Professional Fees
- Management & Administration Fees
- Repairs and Maintenance
- Salaries, wages & Benefits
- Property Taxes
- Travel Expenses
- Fuel Cost (not from Vehicles)
- Delivery, Freight & Express
- Motor Vehicle Expenses (Keep a log)
- Other expenses *(may also be eligible for home office expense) *
Tax Form: T2125E: Statement of Business of Professional Activities
If you have any tax related questions around expenses or flipping properties as a business, reach out to Susan Ivanovics CPA by email: firstname.lastname@example.org