September 24, 2018 | Selling
If you’re a real estate investor, you may have heard of pre-construction condo flipping. The term refers to the practice of selling purchase contracts for units that haven’t been registered yet. As an investment strategy, it can provide high returns on investment. Unfortunately, it’s also been in the news lately—for the wrong reasons.
If you’re thinking of flipping a pre-construction condo, you should know what the recent controversy is all about. Learn why these transactions have been drawing media attention, and what you can do as an investor to protect yourself.
What is pre-construction condo flipping?
When people use the phrase “pre-construction condo flipping,” they’re talking about assignment sales. Here’s how a condo assignment works.
You can’t sell a pre-construction unit because it’s still in development, and therefore it doesn’t exist yet. What you can sell, in many cases, is your contract with the builder. The person who purchases your contract from you (typically referred to as “the assignee”) can’t renegotiate—they’re agreeing to the terms you’ve already accepted. In most cases, they’ll have to put down the same deposit amount as you did.
For many people, the decision to sell a deed is based entirely on the timeline involved. The completion of a pre-construction project can take years. During this time, a buyer might be relocated, get married, or decide they don’t want their unit for some other reason.
The difference with flipping, of course, is that you’re making your purchase with the intention of selling. From an investment perspective, selling a contract for a pre-construction unit can be very lucrative. This is especially true in Toronto’s red-hot condo market, where property values can shoot up quickly. That said, there’s a right way and a wrong way to sell an assignment condo, and getting it wrong could land you in hot water.
Why is it controversial?
In the fall of last year, pre-construction condo flipping began making headlines in Toronto and Vancouver. Stories of sellers who made large assignment sales and avoided paying the taxes began to emerge. As a result, the Canadian Revenue Agency (CRA) started to look closely at these cases.
When it comes to pre-construction flips, Ontario developers aren’t required to report details to the government. These transactions are private, and the taxation rules surrounding them may be unclear to some sellers (also known as “assignors.”) The CRA has found that assignment sales aren’t always handled properly and that many assignors owe large sums in taxes from past assignment sales.
In British Columbia, the government is creating a database to track pre-construction condo flipping. It will contain comprehensive information on sales that fall into this category, which will be shared with federal and provincial authorities.
Time will tell whether Ontario follows suit, but one thing is clear. The CRA will continue looking into assignment sales to see how they’re dealt with and whether money is owed.
Capital gains & HST
When you sell a pre-construction condo contract, the CRA will almost always classify you as a builder. In these situations, you owe the government not only capital gains tax, but HST. The HST will apply to the deposit you’re getting back when you sell, as well as the profits you make from marking up your price.
As an assignor, it’s your responsibility to collect HST from the assignee. Unfortunately, getting the person who purchases your contract to take on these costs can be a hard sell. In practice, assignors typically aren’t adding that 13 per cent to their sale price. That said, these taxes have to be paid, one way or another.
When it comes to capital gains tax, remember that the rate of inclusion is 50 per cent. In other words, you’ll be taxed on half of the profit you make when you sell your purchase contract.
The bottom line
Pre-construction condo flipping can be highly profitable, but sellers should exercise caution. It’s important to know the taxation rules that apply to your precise situation. A certified accountant can help ensure that your sale is above board, which will help you prevent an unpleasant call from the taxman in the future.
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