50 Million New Reasons Why You Shouldn’t Flip Your Condo

Andrew la Fleur:
On today’s episode, we’ll talk about 50 million new reasons why you shouldn’t flip your condo. Stay tuned.

Speaker 2:
Welcome to the True Condos podcast with Andrew la Fleur, the place to get the truth on the Toronto condo market and condo investing in Toronto.

Andrew la Fleur:
Hi there, welcome back to the show. Andrew la Fleur here as always with you. Thanks for taking the time and if you appreciate the show, if you like what you’re hearing, if you wouldn’t mind leaving a review for the show or a rating for the show on iTunes, that would be much appreciated. As always, it’s a great way for me to help get the word out about the show so that more people can listen to it and find out about it and hear it. Also, feel free to share this podcast, this episode with anybody who you think might also gain value from it and if you’re not already, make sure you’re receiving my weekly email updates on all things condo investing in Toronto and the best new opportunities for investing your money in condos and otherwise in Toronto. Just sign up anywhere at truecondos.com with your name and email to make sure you don’t miss those weekly emails from me.

Andrew la Fleur:
Okay. On today’s episode, talking about 50 million new reasons why you shouldn’t, you should not flip your condo. So there’s an article I will link to in the show notes if you want to check it out in the financial post headline is condo flippers beware, the tax man is watching you and has new tools at his disposal to take action. So the recent budget to 2019 federal budget announced another $50 million funding boost to the CRA to quote, “Address tax non-compliance in real estate transactions.” So we’ve been talking about this for a number of years. You might’ve been hearing about this for a number of years. It is true, it is happening. It is a reality. And that is that the CRA is certainly going after real estate investors. Anybody who’s made money in real estate and there’s a lot of you out there who have done so in the last five years or so, especially.

Andrew la Fleur:
So they’ve got 50 million new dollars of funding. That means lots of people that they have hired to go out and hunt and look for anybody who has incorrectly or not at all reported their profits in real estate. So in particular, this article is talking about flipping condos and what constitutes a flip. And again I’ve talked about this many times on the podcast and that’s my philosophy on assignments with condos, that is don’t assign, it almost never makes sense for condo investors to assign their condos. That is to sell the condo before the building is complete on assignment. And there are a number of specific reasons for that. Again, I’ll include links to the show notes for three part series, podcast series that I did on that a while back, which goes more into depth in the reasons why you shouldn’t flip.

Andrew la Fleur:
But it comes down to one of the biggest reasons is that if you’re flipping your condo, if you’re assigning your condo, if you’re selling it before the building is complete, especially, it’s not considered a capital gain per the CRA. In years past, maybe five, 10 years ago, people were assigning condos left and right. Many people were not reporting those profits at all to their CRA saying, “There’s no way for them to even know that I made this money.” Obviously that was always illegal and is still illegal, against the law to not report such a gain. But a lot of people were getting away with it for a long time. Anecdotally that’s our understanding at least that a lot of people were doing that and just simply buying condos on paper or selling them by assignment a few years later, you know, wipe your hands, Bob’s your uncle and there you go, you’ve got a tax free gain there. You don’t report it to CRA and all that money just goes straight back into your pocket.

Andrew la Fleur:
Obviously as I said, was always not allowed, was always illegal, but CRA was not really going after these people with any significance until a few years ago when they really started to wake up to this reality. And as condos in particular and pre-construction condo market has gotten bigger and bigger and has gotten bigger and bigger and more and more important piece of our real estate market across the country, not just in Toronto and Vancouver, but condos are playing a bigger and bigger role, of course, in the real estate market across the country. CRA is not stupid. They figured this out. They see what’s happening, they see where they’re following the money quite simply. And so now we have, again, another $50 million on top of all the previous money that has been poured into the CRA to go after in particular condo investors who are flipping their units and either not reporting it at all, which is of course a big, no, no, never do that. Or those who are trying to get away with reporting these flips as a capital gain and not as income.

Andrew la Fleur:
So again, if you’re not familiar with the difference between them is a capital gain, you are saying, look, I bought an asset and I sold that asset at a profit. Such as stocks, you buy a stock, you sell the stock at a profit, you report it as you have done a capital gain. Therefore, with capital gains tax, you only pay your tax. Your marginal tax rate is only applied to half, 50% of the profit that you made, the net profit you made. Versus income is of course different, income is 100% of the profit that you made is added to your income. And 100% is tax at your marginal tax rate. Whatever the highest your last dollar that you earn, that highest tax rate you pay on that full 100% of the profit. So that’s the biggest thing with, I mean there’s many reasons, but the biggest thing is just look, if you assign that condo, you’re paying double the tax that you would pay if you don’t assign it, if you just hold on to it for minimum rule of thumb, minimum one year after the building’s complete.

Andrew la Fleur:
And then you sell it, you only pay half the taxes that you would pay if you assign the thing. So for a number of other reasons, but that’s the biggest, most obvious one is look why, stop paying double tax. Stop doing that to yourself going to investors, don’t assign those units. Really the only case whereas I say, that you even make sense to maybe assign is if you absolutely cannot get a mortgage, you cannot close on the thing and you’re at risk of defaulting and losing your whole deposit or worse if you don’t assign the thing, then it might make sense for you to do it. Or if somebody offers you some astronomical number that just is way above, you know, really what it’s worth, then it might make sense for you to do it. But that almost never happens. But again, if you actually do the math, very interesting, and I might break this down on some future episode or video or something.

Andrew la Fleur:
But if you actually do the math, even if you can’t get a mortgage like a regular mortgage, in many cases, it’s actually you’re better off to close on that condo that you bought pre-construction, to close on it with a private mortgage and to actually pay double digit interest rates for a year. So to pay massive amounts of interest for one year while you rent out that condo and then you sell it after a year, even though you’re paying, you might be paying 10%, 12% interest on your mortgage for that one year, you’re actually better off to pay that and take that huge hit on interest on that property for a year and then sell it than you are to sell your condo by an assignment. So think about that. Think about how bad things must be if it’s better off to actually sell it, to take a private mortgage and hold it for a year with that private mortgage and pay those astronomical mortgage interest rate. This isn’t the case if you can’t get a traditional mortgage.

Andrew la Fleur:
But again, reality is most people can, most people figure out a way to do it. Very few people will be forced to get a private mortgage for any investment condo that they purchased, you know, three, four, five years ago. It’s very unlikely that will happen. But even still, even if you’re in that painted into that corner and you need that private mortgage it is still better to do that. So again, this article just goes into more details, yet another reason, yet another warning flag for you the condo investor. How does the CRA define, if you’re curious, like what is the definition between if it’s a capital gain thing or if it’s a flip and it’s actually treated as income. Well, a lot of it comes down to your intention, what you intended when you purchased the unit. And so at the burden of proof is on you, the tax payer early to prove to the CRA that you intended to live in the unit and for some reason that was not able to happen.

Andrew la Fleur:
And so you decided to sell it, to flip it and only in the case where you can clearly prove your intention was to move into it, but it’s suddenly something changed and it was just not possible to do that, maybe the CRA will rule in your favor and say, “Okay, we’ll make that exception for you and we’ll call it capital gain and not income.” But again, the article goes into detail about somebody who was fighting the CRA for close to a decade to get them to finally rule in their favor. In that case, do you really want to fight the CRA for a decade and have this hanging over your head for a decade just to, maybe save a little bit of tax dollars year? Probably not. Definitely not worth the headache and the aggravation and the stress of that having that hang over your head.

Andrew la Fleur:
So rule of thumb again, is hold the property for a year after completion, rent it out for at least a year before selling it. And in that case, as long as you’re not doing that, constantly and if you’re selling condos every six months or every year for over and over and over again, then you’re probably going to get flagged as being in the real estate business as well. And a professional real estate investor and you probably will have to start paying the full hundred percent amount, not a capital gain, 50% amount. But if you’re, you know, rule of thumb, if you’re just selling a property once every few years it’s less likely that you’re going to be flagged as such. Again, buy and hold, buy and hold, buy and hold all day long. Buy and hold, don’t sell, hold onto properties as long as you can. That’s the best way to grow your wealth, get out of this mindset of buy and flip, buy and flip, buy and flip. That is a dangerous mindset to be in.

Andrew la Fleur:
It’s not going to make you wealthy in the long run and the CRA is just going to get worse and worse and worse on you if that is what you’re trying to do. And finally, just a side note here is, again, the only tax free thing that we’ve got left in this country really have any significance is your principle residence. So that is if you’re buying and selling your principle residence, you’re not paying tax on that. So again, my advice for everybody, especially if you are on the younger side of things or if you do not have dependents, children, that is move often. Keep moving up, buy a bigger and bigger principle residence. Grow your wealth through that principle residence exemption, financially speaking, it is the best way to grow your wealth and tax free is you’re never going to be tax-free. So as long as we’ve got that, enjoy it, ride it out. Another piece of advice is buy the biggest principle residents that you can, spend the most money that you can on your principle residence.

Andrew la Fleur:
You’re better to buy a more expensive, bigger principle residence and enjoy that tax free than you are to buy a smaller principle residence and then also an investment property where you’re going to be paying taxes on that investment property. So obviously for most people this kind of advice, it doesn’t really work because most people moving is a difficult thing to do. Most people have a million factors and reasons and family and dependence and jobs and other things that dictate that or just preferences and it’s just pain in the butt. You don’t want to move. So I understand that, I totally get that and I’m certainly in that stage of life myself where moving often is just not something that I’m going to entertain. But if you are in a stage of life where moving is relatively easy for you to do, and if you understand what I’m saying, then you will understand that financially speaking, the best thing to do is to grow your wealth through that tax free asset known as your principal residence, and that’s the best way to grow your wealth in the long run.

Andrew la Fleur:
Even though I sell investment real estate and obviously I make zero dollars by telling you to buy your principle residence and not buy investment real estate, financially speaking, that’s the best way to do it, because it’s tax free again. Okay, there you have it. Hope you enjoyed this episode and hope you got something useful from it. Until next time, happy investing and we’ll talk to you soon.

Speaker 2:
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