People are finally talking about shifting income tax to take some of the money out of the housing market:
First:
a lifetime cap of $1-million on the personal residence capital gain exemption […] would limit unproductive investment in the real estate sector by discouraging retirement strategies based on the gains made from selling a house. It would also stop the investment strategy of buying a house, renovating, living in it the minimum amount of time to claim the tax credit and then flipping it for a tax-free gain.
They note that the lifetime cap wouldn’t hit most Canadians in lower-cost communities. It should mostly hit higher end houses and higher income taxpayers.
Second:
a limit applied to the amount of interest that can be recorded as a business expense for single-family residences let as rental properties
They’re suggesting these changes because
investors are the fastest growing mortgage segment with a 30-per-cent share of mortgaged home purchases nationally in the first part of this year, up from 19.6 per cent in 2020. They are now a bigger segment than repeat homebuyers and, over the past few years, have taken 6 per cent of market share from first-time buyers
It’s also not clear to me how a personal exemption limit solves the stated issue of investors gobbling 30% maker share. Investors aren’t covered in the personal exemption anyways. Would it reduce house flippers? Sure, but they only occupy one residence at a time anyways, so they aren’t reducing supply.
Capital gains, not total sale price of residence.
a lifetime cap of $1-million on the personal residence capital gain exemption.This fucks anyone who moves or is recolacted for work. When I was in the army I was relocated every 2 years, so I’d burn through that cap in 8 years @250k, 4 years @500k, or a single posting to Ottawa. Police and border are in the same boat.I’ve got a banker friend, they get relocated branches every 4 years.I’ve got a doctor friend, she took a residency doing rural medicine in nowhere BC; but she plans to move back with her family in the Victoria area eventually, her family probably wouldn’t or couldn’t do that with a residence cap. That lifetime cap could change the calculus for doctors doing stints in areas that really need them. Particularly since these stints are normally early in the career while the cashflows are still tight from medical debts.They note that the lifetime cap wouldn’t hit most Canadians in lower-cost communitiesIt could hit them worse then higher-income. There isn’t a lot of space to play with an extra tax payment, on top of all the other costs, to relocate for work opportunities.It would also hit the retired community pretty hard, they are unlike to gain new sources of income, so that would be a big smack if they were looking to downsize or more to assisted living. That could cause an increase in predatory reverse mortgages.This is a personal blind spot, but I’d guess there’s also impacts on estate planning?This looks like a well written critique, but it’s unfortunately just wrong. You clearly don’t know what a capital gains is, it’s not the sale price of your home.
Capital gains is the sale price, minus what you paid for it (with some other smaller adjustments thrown in). So if you buy and sell regularly, unless you’re making 250k each transaction in profit, you wouldn’t blow through the cap by moving 4 times. If you bought at 800k and sell 2 years later for 900k you’ve only made 100k in capital gains. You’d need 10 of those transactions (and you’d have made a million dollars in profit) to hit the cap, and even then you’d only pay taxes on your actual gain in value not the house price.
A reverse mortgage would only delay the tax until after the death of the person, it’s not like dying invalidates taxes so any reverse mortgage would account for it. If grandpa or grandma sells a place for 1.5 million in profit (assuming they had never sold anything before) they’d only pay capital taxes on 500k (1 million would be exempt) and then the 500k in taxable capital gains are only taxed at 50% of the rate of your income tax rules. They’d likely only end up paying about 100k in actual tax on a 1.5 million dollar profit that you made.
It’s really a tax designed to hit people who invested and held onto more than a single home over many years.
oh thanks. I was thinking in terms of totaly sale prices.
Thanks for the correction, I bungled the captial gains on home sale.
I’m still not sure how capital gains exemption limits impacts investors at all though.
It reduces the potential profit(the return) of investment properties on their appreciation by around 20-25%.
If holding property was giving them an 8% annual return before, now it would only give them 6%. That may not seem like a lot to most people, but to large investors that 25% reduction in return is absolutely massive and pushes them towards investing in other types of assets instead.
When they put their money elsewhere it reduces the demand for properties and thereby lowers prices.
I gather all that; my point is that this is an exemption for principal residences. This would have no impact on investment properties, as they don’t get principal residence exemptions anyways.
Sure, there’s a segment of house flippers (with or without improvements), but they are only occupying one residence at a time, so there is no impact on total housing stock.
There are still loopholes in these rules that can impact it, both of the legal and illegal variety.
For example having a suite in a house usually doesn’t cause capital gains to apply, but it’s partially an investment property at that point. This can be argued all the way up to almost a duplex level of “suite” in some cases.
One of the things people fail to realize is that the supply/demand curve isn’t just for the actual housing. There’s also demand from a strictly financial perspective. If I have an opportunity to make money off simply living in my home, and I can borrow money to make that money, why would I not try to maximize that profit by buying more than I need.
This causes people to pay more for housing than they otherwise would, because they expect to make a return on it regardless. I’m guilty of this myself, my family of 5 owns a house far larger than we need, and we’ve seen appreciation of about 400k in the 3 years we’ve lived here. If we had bought a smaller home, that would have been a smaller increase.
Unfortunately I don’t expect the government to fix this problem anytime soon and if that happens at least there’s even enough space for my kids to live here (even with partners potentially) well into their adulthood.
That appreciation you have seen on your principle residence isn’t really accessible though. You have to live somewhere. If you were hit with capital gains tax on your primary residence, it would impart a whole lot of financial friction on ever being able to move.
Let’s say you need to re-locate, or upsize/downsize; the house you are moving too also has appreciated, but you have to buy that house at the new, appreciated price, and ALSO pay the capital gains on the 400k. That financial friction on being able to move is bad for everyone. It keeps people in inappropriate houses, or commuting long distances, and doesn’t do anything to improve housing affordability.
It does effectively become a transfer of wealth (from lack of taxes) from young to old, as they downsize, and reap the financial windfall. However, that could be clawed back with estate taxes. If you penalize downsizing, you create an even bigger incentive to stay in oversized housing, as you mention. If anything, not being allergic to property tax increases is probably the only thing that would encourage people to rightsize.
I’m just going to point out that that friction doesn’t occur until you’ve made 1 million dollars in profit. You won’t make that off moving condos every few years.
It doesn’t really penalize downsizing that much either, since you’re now realizing that massive windfall. In a downsizing situation the new house would be far cheaper anyways. The tax amount is not that much. To need to pay capital gains on 400k, you’d need to have appreciated by 1.4 million… and then the tax on 400k is taxed at half your income tax rate (that’s how capital gains works) so it’s really only going to be around 80k in tax, on something like a 2-2.5 million dollar sale.
For example having a suite in a house usually doesn’t cause capital gains to apply
To be clear, captial gains ALWAYS applies, you can just apply for exemption for personal use.
If you have you have a rental, suite that portion of the residence is not available for personal exemption.
This can be argued all the way up to almost a duplex level of “suite” in some cases.
Sure, you can argue it, but it’s fraud unless it is a “relatively small in relation to its use as your principal residence.” (Plus the other two criteria). If it doesn’t share a bathroom and kitchen, it’s definitely not “relatively small”.
There’s also demand from a strictly financial perspective.
Oui, puis non. There’s certainly differences on decisions that people make, but the total amount of required rental + owned housing stock remains the same. There’s some flexibility in rental stock, but that’s a function of number of roommates people are willing to accept.
I don’t expect the government to fix this problem anytime soon and if that happens at least there’s even enough space for my kids to live here
I’ve just assumed my children will never leave, and hope that the situation improves enough that they can. Helps me sleep at night.
Your link to the rental suite capital gains part includes the exceptions that most people qualify for, including the relatively small part. “relatively small” usually just means less than half, and includes full suites just fine.
https://househuntvictoria.ca/2020/10/15/does-a-suite-risk-capital-gains-tax-a-professional-perspective/
These changes aren’t designed to fix things, they’re to placate you and make you quiet for a few more years while things continue to get worse.
I think that’s where the other suggestion comes in:
a limit applied to the amount of interest that can be recorded as a business expense for single-family residences let as rental properties
yeah I was gonna say Im on my third place but I never did the whole flip thing. Just life events. Im getting older but will likely have to move at least once more as I age.
not. going. to. happen. Whatever government will be elected next will be guarding interests of people with (more) money. I.e. landlords and house owners. Unfortunately all we can hope for are band-aids while everything crumbles.
To remove resistance there are multiple possibilities, but most of them involve compensating property owners at fair market value today and disincentivese them from holding on to additional properties moving forward, guaranteeing citizens affordable housing into perpetuity and regulating the heck out of real estate market. This way existing property owners are less likely to stage a coup, and future generations are guaranteed to have roof over their head making real estate market unattractive to investors.
But since we are governed by laws of capitalism and not socialism (no, not the idiotic eastern block interpretation of communism) money loss is vewed as a big no-no (instead of seeing human dignity as a prime goal) - none of the above will happen as parties want to get re-elected and they need money for that… well you get the picture.
Whack-a-mole’ing it with micky-mouse measures will prolong the agony but will not end suffering.
TLDR; solution is to change political system first, otherwise there’s no hope for a real solution to any of this.
Member when political parties were getting funded on the number of votes they got?
I member.
Oh man can you imagine a system that actually decided budget by number of voting citizens. That would be wild. Could really incentivize cities, but I could see necessary rural communities being fucked a bit but still something like that would push for higher voter turnout and popular ideology in the governing members
you need to also fix the SUPPLY side of the issue:
- Ban AirBnb-like month+ long rentals
- Ban ownership of homes for the SOLE purpose of renting out
- Ban Rental of homes to AirBnB sharks who then rent out for short terms (Aka Montreal Shuffle)
you need to also fix the SUPPLY side of the issue:
But your suggestions only address the demand side of the equation?
I think that’s why they used the word “also”
also
I like that part.
We build more new units per quarter than all the Airbnb listings that exist across Canada. Banning them would not free up any sort of significant supply.
If you ban ownership for the sole purpose of renting, where are renters supposed to live? Someone has to own every unit that gets rented out. There are many reasons why someone may want to rent rather than owning, ownership is not beneficial in every situation.
Sure ban subletting to Airbnb, it’s not going to hurt anything to do that. Go ahead.
Airbnb is a great scapegoat, it’s easy to point at and does have some realistic impact, but even the biggest studies are showing that the impact is still fairly low. https://www.cbc.ca/news/canada/british-columbia/short-term-rental-report-1.6973598
“The study by McGill University, led by professor David Wachsmuth, found that between 2017 and 2019, the growth of short-term rental units accounted for 19.8 per cent of rent increases in the province.”
So prices doubled, and Airbnb only accounted for 20% of the 100% increase. Going from 1000/month to 1800/month is better than 2000/month, but it’s unaffordable either way. Even if we ban Airbnb, that other growth is going to keep occurring and we aren’t doing a damn thing to slow that down.
We build more new units per quarter than all the Airbnb listings that exist across Canada. Banning them would not free up any sort of significant supply.
Are there any statistics on that that are more granular than “across Canada”? I’d imagine some areas (coastal BC, small touristy towns, prime downtown locations, etc.) Would make up a higher share of Airbnbs than their share of new construction.
It doesn’t really need to be any more granular than “across Canada” if the goal is to house people at affordable rates.
The moment you get into trying to house people only where they want to live and also account for their desired housing size, you get into significant problems that are impossible to solve.
It’s mathematically impossible to house people that way, there are too few desirable areas for the number of people who want to live in them no matter how much we build. I’d love to hear a suggestion on how we could better ration those rather than just making them more expensive until the number of people willing to pay that matches the number of units available. You could build the city of Victoria downtown core into Tokyo level density and it would probably make it more expensive than it currently is rather than less because there would be additional amenities opening up to people.
The thing about the tourist locations at least, is that it’s self correcting. If workers can’t afford to live there, tourist businesses won’t be able to hire workers there. Nobody “needs” to live in a tourist area. Eventually the companies will either figure out a way to house those people to keep making money, or the tourism will die down and open up space for workers again.
Cities are a bit more complex, they also follow similar logic, people don’t “need” to live in the actual core. Not when a 10 minute bus ride gets you to 50% of the rest of the city.
I’m not saying Airbnb is good, or not to ban it, go ahead and do just that because it will help a bit. It’s just that if you do, don’t expect housing prices to actually come down from their current levels in downtowns or tourist locations, they’ll just have a tiny little plateau before they return to climbing again.
I guess I’m just coming from a point of frustration. The area I grew up in wasn’t a tourist area or otherwise very desirable to anyone who didn’t come from the area (long commute to anywhere with decent jobs). I’ve noticed in the last few years that it’s been a combination of people being priced out and moving further and further from cities, as well as a ton of properties being converted to Airbnbs. I understand that not everyone can live where they want, but I think it’s reasonable to be frustrated when the place you lived your whole life becomes unaffordable to those with history there, and the people who can afford property don’t even want to live there themselves.
I think it’s reasonable to be frustrated when the place you lived your whole life becomes unaffordable to those with history there
As long as you are talking about some place in Africa, sure. I’m not sure how reasonable it is to talk about Canada that way as the only reason people came here in the first place is because it wasn’t affordable to stay where they were before.
This is the best summary I could come up with:
George Athanassakos is a professor of finance and the Ben Graham Chair in Value Investing at the Ivey Business School, Western University, London, Ont.
Regarding the housing crisis, we hear a lot about the supply issue but, other than the pressures brought on by immigration, the demand side of the equation gets very little attention.
Furthermore, well-informed and well-organized NIMBY groups that are highly motivated will always find ways to throw sand in the gears of any potential new development affecting the character of their neighbourhood.
Such a policy would have no direct effect on people if they don’t sell their primary residence and would have very limited impact on Canadians living in less expensive communities.
This policy change would limit unproductive investment in the real estate sector by discouraging retirement strategies based on the gains made from selling a house.
It would also stop the investment strategy of buying a house, renovating, living in it the minimum amount of time to claim the tax credit and then flipping it for a tax-free gain.
The original article contains 888 words, the summary contains 174 words. Saved 80%. I’m a bot and I’m open source!
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