With recent changes to capital gains tax legislation, Canadian real estate investors, especially those who consider themselves “home flippers,” should stay informed about how these updates could impact their financial strategies.
At Phillips and Munro Real Estate Team, we’re always committed to guiding our clients through the ever-evolving real estate landscape. We will explore the latest capital gains tax law amendments, effective June 25, 2024, and their implications for property flippers.
Changes in Capital Gains Tax in Canada
Recent changes to the capital gains tax laws, effective June 25, 2024, have introduced updates that could impact how financial gains from real estate transactions are taxed.
Here’s what you need to know about these changes and how they will affect flipping properties:
Increased Capital Gains Inclusion Rate: Starting on June 25, 2024, the capital gains inclusion rate will rise from 50% to 66.7% for gains over $250,000 per year for Canadians. This means a larger portion of your capital gains will be subject to tax. This higher rate will also apply to all capital gains for corporations and most types of trusts, regardless of the amount.
Increased Lifetime Capital Gains Exemption: The government has raised the lifetime capital gains exemption to protect middle-class entrepreneurs from the increased tax burden. This adjustment ensures that most middle-class business owners will not face higher taxes due to the changes in the inclusion rate.
For more information on BC Home Flipping Tax, visit the BC Government website here.
The Impact on Real Estate Investors and Property Flipping
Higher Tax Liability: The increase in the capital gains inclusion rate means that property flippers will now pay more taxes on their profits once they sell a property. For instance, a larger portion of these gains will be taxable for those selling properties with gains exceeding $250,000 annually. This change reduces the profitability of short-term property investments, making it more difficult for flippers to turn a quick profit. This information is essential for property flippers to reassess their strategies.
Stricter Compliance and Reporting: With stricter reporting requirements, property sellers must now provide more detailed information about their transactions. This includes documentation of the property’s use, ownership duration, and any exemptions claimed. We recommend that owners maintain accurate records to avoid any penalties and comply with the new regulations.
Strategic Considerations for Property Investors: Given the higher tax rates, we recommend that property flippers extend their holding periods to benefit from lower capital gains tax rates applicable to long-term investments. This means we recommend owners hold onto their properties for longer periods of time before flipping and selling. This approach can help mitigate the impact of the increased inclusion rate and improve overall profitability.
Is There Good News for Real Estate Investors and Flippers?
Despite the recent changes in capital gains taxation, there IS good news for real estate investors and flippers. The new regulations maintain several important exemptions and introduce incentives that could benefit savvy investors. Here is a list on the Government of Canada website of what is NOT changing regarding capital gain taxes.
Another thing to consider is the Lifetime Capital Gains Exemption has been increased, protecting middle-class entrepreneurs from higher taxes. This means that many small business owners and investors can still benefit from significant tax relief on certain gains. Additionally, the recent introduction of the Canadian Entrepreneurs’ Incentive encourages investments in high-growth sectors, mainly in fintech and manufacturing, offering new opportunities for investors seeking to diversify their portfolios.
In the realm of real estate, the good news extends beyond tax exemptions and incentives. The increased taxation on short-term gains might lead to a cooling effect on rapid property flipping, potentially stabilizing housing prices, especially in high-priced cities like Vancouver and Toronto. This stabilization could benefit long-term investors by creating a more predictable market environment. As speculative flipping decreases, we may see a reduction in the artificial inflation of property prices, making it easier for genuine buyers to enter the market. According to Global News, these changes aim to balance the market and make housing more accessible, which could be a positive outcome for both investors and homebuyers alike.
The Phillips and Munro Real Estate Team Can Help
The recent changes to Canada’s capital gains tax laws represent a significant shift in the landscape for property investors and flippers. By understanding the new rules and adjusting strategies accordingly, investors can continue to find success in the real estate market.
At Phillips and Munro Real Estate Team, we are here to support you through these transitions, ensuring that your investments remain profitable and compliant with the latest regulations. Contact us about your next property investment or real estate questions today: (604) 537-4281
For more detailed information on the recent tax changes, you can refer to the sources from Canada.ca, Global News, and CBC News.