Should I hold my Toronto real estate presale or should I sell the assignment
Tuesday Mar 08th, 2022
Condo investing is a lucrative opportunity in Toronto's hot real estate market.
If you're looking for new condos for pre-sale in Toronto, you'll be pleased to learn that condo sales have increased dramatically in recent years, especially in larger Canadian cities like the Greater Toronto Area. As land inventory has become more constrained and the market, increasingly competitive, many investors have turned their focus on pre-construction condo investment options.
When you are investing in a pre-construction condo, should you sell the rights (assignment), or should you hold the investment for the long term?
Selling the assignment
As the owner of a pre-construction condo, you technically can't sell your pre-construction condo because it hasn't been built yet. Sometimes it can take years to build condos and your plans change, or you're looking to put money into a different investment opportunity. An option to get around selling your investment condo is to actually sell the contract for your pre-construction condo, also known as Assignment sale. You can read more about the process of assignment sale here.
In terms of investment, selling the assignment before the building is completed has these advantages:
1. One-time capital gain
In the recent hot Toronto Real Estate market, a pre-construction condo that you may have purchased 1 year ago, can easily increase 10-15% in value. By selling the assignment, you can receive a 1-time capital gain.
2. Avoid all necessary Land Transfer Tax and fees
Selling the assignment can avoid all the necessary closing costs, land transfer taxes, and fees and other building fees that occur at closing.
3. No need to get a source of funding
If this is a investment property, it may be more difficult to get the full mortgage to close the sale. By selling the assignment before the building has completed, you can avoid getting yourself into situations where you need to find a source of funding.
4. Problem: Net gain will need to be reported as year of sale
The biggest issue is with the tax implication. By selling the assignment, the profits are considered business income, you will be taxed 100% of the net gain to be reported as income during the year of the sale. If you are a high-income earner in the high tax bracket, that means the net gain of the sale will be taxed in the high tax bracket.
Holding for long term
So, why should you hold this for the long term?
1. 4% Gross Rental
n Toronto, the gross rental yields amounted to near 4% in the city center as of February 2022. Rental yield is the amount a property investor is likely to earn through renting a property. As landlord, investing in GTA offers relatively high gross rental yield comparing to Asian cities, where it is typically 1% or less.
2. When selling, only need to report 50% of the net gain as the year's income
When you are selling the condo after it has been built, it is considered as a capital gain, and you only need to be taxed 50% of the net gain as capital gain as the year's income. That's a big difference from 100% when you are selling the assignment before the condo has been built.
3. Better Tax planning
Many investors buy when they are earning high income, and sell when they are in a lower tax bracket (after retirement) - this allows the gain of the sale to be taxed at a lower tax bracket.
4. Problem: Need to have enough money to complete the deal
As mentioned, closing a real estate deal will require a source of funding, such as a mortgage. There are other closing costs that may be needed, such as the $24,000 HST Housing Rebate if this is intended for investment purpose. If the investment property is able to lease with a 1 year rental contract, you can get the rebate back.
Should I sell the assignment or should I hold?
Putting your money into real estate is not a short-term investment, and this is even truer in the pre-construction market. Investing in the stock market can give you solid immediate returns, but nothing can compete with the long-term growth that you get when investing in real estate. Rental pricing will remain steady despite major shifts in the economy, so your rent will get paid despite any outside market fluctuations.
If financially possible, it's better to complete the sale and hold for the long term, especially for high bracket individuals.
Only assign when there are individual financial circumstances, because each sale requires realtor commissions, lawyers fees and tax implications, and selling the assignment is not a sustainable, long-term investment style.
Buying and Selling Toronto Real Estate
Whether you are buying your first condo, or selling a single-family home, Team Priscilla Han Realty can help you.
We are proud to serve the whole Greater Toronto Area (GTA), including but not limited to Markham, Mississauga, North York, Pickering, and the City of Toronto.
We help research properties that are best tailored for home buyers, providing them with instant notification of newly available properties, access to exclusive deals that are not on the MLS.
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