Planning To Buy And Flip Foreclosed Homes For Cash? What Documentation Can Help You Avoid An Audit?

If you've been anxious for years to get into the rental real estate market but haven't been able to scrape up the necessary down payment and monthly cash flow for a modest rental home in your area, you may be starting to lay the groundwork for investing in foreclosed homes for flipping purposes by getting your real estate agent or broker's license. By buying foreclosed homes at auction or purchasing them on behalf of a larger investor, you'll often be able to quickly recoup your initial investment before even renting the home out to tenants. However, there are a number of recordkeeping and reporting requirements instituted by the federal government when it comes to real estate agents, and purchasing and selling for cash remains one of the easiest ways for foreclosed properties to move through the market. Read on to learn more about what you'll need to report (and track) to avoid a costly audit when launching your real estate empire. 

What should you keep in mind when documenting a foreclosure real estate transaction? 

Becoming a real estate agent or broker brings with it a number of additional powers and responsibilities that those conducting a "for sale by owner" sale can't enjoy. Among these increased responsibilities is the duty to report large cash transactions (defined as any transaction exceeding $10,000) to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). You're also obligated to report any transactions that may indicate the presence of money laundering, which can often financially bolster terrorism -- in the foreclosure context, money laundering may often take the form of a complicated ownership structure wherein an investor will use his or her handpicked tenants to funnel higher-than-market rent to the investor's holding company. Not only are you required to report these transactions to FINTRAC, you're also required to do your own independent investigation into the identity of the person instigating the transaction and provide the results of your investigation to FINTRAC.

As a result, when purchasing or selling a foreclosed property for cash, it's important to keep certain records so that you can later substantiate these transactions to FINTRAC's satisfaction. You'll need to include any documentation of the research you did into the cash buyer's or seller's identity, a receipt for the cash exchange (even a handwritten one is better than nothing), and any records of the purpose or intended nature of your business with the cash buyer or seller. Having this paperwork handy can save you future headaches -- particularly those that could impede your ability to purchase and flip more homes. 

What else can you do during a foreclosure flip to reduce your risk of running afoul of tax or real estate laws? 

After you've purchased a foreclosed home and begun the renovation process, it's crucial to keep copies of any receipts or invoices generated. Doing so can help you establish your basis in the home post-improvement so that you're not required to pay taxes on the full sale amount, instead deducting the amount you spent on improvements. Over the course of a major renovation, this can save you thousands of dollars.

You may also want to consult an attorney or tax professional before selling your first "flip." Although this transaction is likely to be considered an income-generating one rather than an investment sale, therefore implicating the less-favorable income tax treatment, you may find that you fall within an exception to this rule that could allow you to pay only the 50 percent capital gains tax rate on your earnings. Seeking professional advice before paying your taxes may be one of your wisest financial decisions.

When you are ready to start renting the property to tenants, check out a property management company like Rest Easy Property Management ottawa property management for assistance.