Jake & his squeeze bought a new 905 house from plans 18 months ago, and just learned it won’t be habitable until (maybe) mid-2017. Like most moisters, they have a burning question, and naturally come to this blog first, where we find young people highly amusing.
“We’re in our late 20s (recently married) with combined salaries of $170,000 (near equally split) and with modest bonuses should hit $200k,” he says. “Our assets include $70k in TFSAs (mostly liquid, $30K in bank stock and cash of $200k (yes shame on us).
“The reason we’ve been so liquid with our money was to put down a 20% down payment. From our perspective we can either continue renting until the house is ready (a lot can change in 9 months) or we cash out and do something with the gains. From what we’ve been told, the plans is now with between $600 and $650K. I’ve considered the tax implications of an assignment sale and would be curious as to your thoughts about the home and our general financial situation.”
This is easy. First, Jake has to read his APS carefully to see if he can even sell the place before he’s closed on it. In other words, does the sale agreement allow for an assignment? If it does, then the purchaser has the right to sell the paper to a new buyer for whatever price the two negotiate. They can establish a new closing date, Jake collects a deposit, and when the deal is done, he gets all the proceeds at (hopefully) the same time he must close with the builder.
But there’s risk. The second buyer can always choke and fail to close, for example, likely forfeiting the deposit. In that case Jake would have to honour the existing contract, or face the legal consequences. And, yup, there are also tax consequences. The young couple could try to claim the profit as a capital gain, and pay 50% of the profit at their marginal rate, but the CRA might think differently. An audit would reclassify that as income, meaning 100% would be subject to tax – added to existing income, bumping them close to the top tax bracket. Ouch.
So is it worth doing?
Nah. Probably not. Better to close on the house, occupy it for a brief period and then take it to market. While a capital gains tax exemption is unlikely in that instance (the general rule of thumb is a home must be occupied for two of the five years prior to a sale to be exempt), at least the profit won’t be taxed as income. And there’s nothing stopping Jake from marketing the house early, then arranging a long close.
Risk here too, however. The middle of next year is a long eight months away, and lots could happen. US interest rates are going up. So will bond yields and fixed-term mortgage rates. The American election’s an unknown, since Mr. Make-America-Great-Again may try to destroy it by not accepting the election results. Meanwhile the Canadian economy continues to sink, foreign buyers are being treated like barbarians at the gate, and Wild Bill’s mortgage mayhem has the potential to kick 20% of all buyers out.
In other words, do not assume the market next summer will be like the one last summer. I mean, just look at BC. What a mess. Sales are down 90% in some neighbourhoods and prices are crumbling from the top down. The locals think this was the result of the 15% Chinese Dudes tax, but in reality it’s what happens to a market when prices detach from the underlying economy. Things can function so long as people are willing to swallow massive debt, but when that ends, so does the boom.
By the way, housing analyst and rebel realtor Ross Kay points out the current stats showing a collapse in Chinese dudes buying in VYR since the tax was imposed in late July are meaningless. Why?
“Historically we know 80.3% of all sales reported from March through July will close between June 15th and September 30th, which coincidentally just happens to cover the CLOSING data released by the BC gov’t to date on foreign buyers,” he says. “The BC gov’t data shows that of the 59,616 Closings reported between June 10th and September 30th, 2016, only 3,015 or 5.06% were bought by foreigners.”
In other words, no more than 5% of all sales in BC in the months prior to the tax being imposed, he concludes, went to those evil offshore buys. “It appears that those that believed foreign buyers normally command 3% or less of the market were not far off when the maximum is finally revealed in BC.” So, yes, you can blame the politicians in Victoria for the crash now unfolding in Vancouver by imposing a discriminatory tax on a market they didn’t understand. It was always about optics.
So back to Jake.
You can concentrate almost all of your net worth into a single asset, and hope the market survives long enough to get out. You could also sell the paper now eliminating that risk, but be roundly taxed on your windfall profit. Or you could be like most people. Stop reading this pathetic blog, move into your new house, decorate it to impress your friends, let it Hoover up all your wealth (with no Plan B) and trust Justin will protect you.
That should work out well.