[:en]If you’re getting your BC real estate license, you likely know the high home prices that have been taking over the Vancouver housing market. Now, some real estate agents are looking to increase their profits even more by “shadow flipping,” a technique that may land them in trouble with the Canada Revenue Agency (CRA). Our experts at Benson Wang have outlined this technique and its dangers in the article below.
What Is It?
Shadow flipping is a process that involves real estate brokers using an obscure “assignment clause” in their sales contracts that allows the property to change hands, increasing the price multiple times before the deal closes. Ultimately, it is used to drive up prices and commissions in a market where the prices are already sky-high.
A real estate agent has a client that agrees to sell a property to a buyer for $1 million. The agent subsequently assigns the contract to a second buyer for $1.5 million, and then a third and final buyer for $1.8 million, netting them a commission for each sale and allowing the first buyer to pocket $500,000 and the second $300,000. The final buyer is left with the property transfer tax on the final $1.8 million purchase price. Due to just one sale being registered, the middlemen all avoid property transfer taxes.
The assignment clause that this process is based upon was intended to give buyers a legal way to back out of a purchase due to changing circumstances, although now it is being used as a legal loophole for the above scheme. In a market where prices have already reached heights far above those affordable to local buyers, this technique makes things even more difficult for them.
The practice is currently legal, although real estate agents are required to disclose their intention to either hold a property for their own use or to resell it. Furthermore, if the CRA discovers that a shadow flipper has sold a house repeatedly and has not lived in the home as their primary residence in the year prior to selling it, they can hit them with a capital-gains tax and additional penalties.
In a market where prices are already high, shadow flipping is becoming an increasingly glaring problem. If you’re planning on getting your BC real estate license, be aware of the legalities of this procedure and the potential penalties that you face taking part in it.Failing to grasp the consequences can cost you money and, even worse, legal troubles. For more information or further questions, give us a call at (778) 686-8555 and we’ll be happy to assist you.[:]