In the ever-shifting landscape of real estate regulations, British Columbia is implementing a transformative measure: the BC Home Flipping Tax. Set to take effect on January 1, 2025, this tax targets income derived from the sale of properties owned for less than two years. As we go through how this tax works, it is important to note this tax is on top of our already established (January 1, 2023) Federal Flipping Tax. This rule ensures that profits from flipped properties are treated as business income, impacting capital gain considerations and the availability of the Principal Residence Exemption.

The home flipping tax in British Columbia will be applicable to earnings from properties sold on or after January 1, 2025. If a property purchased before the tax's effective date is sold on or after January 1, 2025, it may be liable for the new tax if the sale occurs within 2 years, unless an exemption is applicable. The purpose of this tax is to discourage the short-term holding of property for profit. The new BC flipping tax is a 20% tax on the gain from the sale of a home, purchased within the last year and a pro-rated tax, on sales up to and within a two-year period.

If you sell your property on or after January 1, 2025, any income generated from the sale may be subject to the new tax, provided that the property was purchased within the last 2 years. The applicability of the tax depends on the purchase date of the property. For example; if you bought a property on May 1, 2023, and sold it on January 31, 2025, the income from the sale would be taxable. However, if you decide to sell a property on June 1, 2025, the income from the sale would not be subject to the tax. This is subject to residents of Canada or residents anywhere else globally.

Exemptions

Certain life circumstances may qualify you for exemptions if they motivated the property sale within 2 years. Examples include separation or divorce, death, disability or illness, relocation for work, involuntary job loss, change in household membership, personal safety, and insolvency. If you sell your primary residence within 2 years of purchase, you may also exclude up to $20,000 when calculating your taxable income. The tax aims to support housing supply, and exemptions will be granted to those contributing to housing supply or involved in construction and real estate development.

The tax will be applicable to income from the sale of properties with a housing unit, properties zoned for residential use, and the right to acquire the above properties, such as the assignment of a purchase contract. Special rules will apply to properties or portions with non-residential purposes. Income from the sale of properties on reserve lands, treaty lands, and lands of self-governing Indigenous Nations will not be subject to this tax.

The Federal Flipping Tax

Effective from January 1, 2023, the deeming rule represents a shift in the taxation of flipped properties. Its primary objective is to ensure that profits from the sale of a flipped property are subject to full income inclusion. Under this rule, profits derived from the sale of a flipped property are deemed to be business income. This designation has significant implications, as these profits cannot be treated as capital gains (with a 50-percent income inclusion), and the Principal Residence Exemption is rendered inapplicable.

The deeming rule fundamentally alters the tax treatment of profits from property sales. Traditionally, capital gains from property sales benefit from a 50-percent income inclusion, providing a favorable tax treatment. However, the deeming rule negates this advantage by classifying profits from flipped properties as business income, resulting in full income inclusion. Consequently, the tax advantages associated with capital gains are eliminated, and the Principal Residence Exemption, a significant benefit for homeowners, does not apply.

As British Columbia positions itself at the forefront of real estate regulation, individuals and stakeholders must adapt to the evolving landscape. The BC Home Flipping Tax, along with the Federal Tax reflects a comprehensive effort to discourage speculative practices and promote stability in the housing market.

Market Changes

While the introduction of these taxes are aimed at speculators in hopes to create more affordable housing, we don’t see this having a significant affect on the market and certainly wont improve affordability. It is shown that less than 2% of sales are attributed to speculators. We expect this new tax to cause many sellers to delay their plans to sell, further reducing the supply of homes for sale. Instead of increasing affordability, this shortage of supply will lead to an increase in prices, making homes less affordable for British Columbians.

Although these taxes aren’t optimal, it is important to stay updated on the legislation in BC and prepare for how they might impact your future plans. For more guidance on how this may impact you specifically, be sure to contact a professional. Reach out to us today!