A new day, a new tax. You like taxes? How about second taxes? How about taxes on taxes? Oh, those didn’t have the intended effects, and instead lead to easily foreseeable and avoidable unintended consequences? A tax should fix that.
Sometimes I feel like Mugatu in Zoolander. Is everyone taking crazy pills?
Changes to BC Taxes and Provincial Budget
Ok, so the BC NDP government recently tabled their 2024 budget, and in there, among other truly puzzling announcements, like a nearly 8 billion deficit despite revenue increasing by 1.8 billion, renaming manhole covers to service access covers, and changing the first time home buyer’s PTT exemption in the most complicated way possible, they announced a new tax, on home flipping.
What is the New “House Flipper” Tax?
If passed, this new legislation would take effect January 1st of 2025. The government argues that it’s greedy “houseflippers” contributing to the lack of housing affordability, by gobbling up the supply and forcing the general public to compete on inventory, thereby driving prices.
The tax would apply to the profit of a home sold inside 2 years, with 20% applied if sold in the first year, decreasing to zero if sold 2 years or later. So 100% of the tax up to 12 months and then it decreases to 0 at 24.
So let’s say you buy a home next year, and for one reason or another sell that home within 12 months for $100k more than you paid for it, you would owe $20k in taxes on that sale. This is of course over and above the federal home flipping tax that came into effect January 1st 2023, that subjects profits on homes sold inside 1 year to taxation as business income rather than capital gains.
This federal scheme had no impact on pricing btw, home prices in the GVA actually rose about 15% on average shortly after it was introduced.
Exemptions to the “House Flipper” Tax
There are of course a number of exemptions to this new scheme.
I contend that this will not increase affordability, and will have a number of unintended consequence, including increasing prices in the short term, and reducing consumer choice overall.
Negative Impacts of BC’s Newest Real Estate Tax
First let’s discuss the purpose of a tax in broad terms. Taxes are mandatory contributions levied on individuals or corporations by a government entity to fund that entity, the government. In the context of housing, a specific type of tax can be used as an economic mechanism that applies pressure to a consumer to disincentivize a particular action.
In this case it disincentivizes selling a home inside of 2 years. This is important, because it doesn’t necessarily disincentivize the purchase, only the sale.
BC NDP Premier David Eby admits it’s not a cure all saying, “The flipping tax is not a silver bullet. If it was a silver bullet, it would have been fired a long time ago. It’s just one piece of the overall strategy to deal with housing.”
Of course the new tax is receiving it’s fair share of criticism, with Tom Davidoff, director for UBC’s Centre for Urban Economics and Real Estate saying, “I don’t expect this tax to make a great deal of difference either way,”
and Brendon Ogmundson, chief economist of the B.C. Real Estate Association, says the tax could end up reducing the overall number of homes on the market while only applying to a small number of properties.
“I think that the cost of this policy, and the unintended consequences of it on the supply side of things, are more trouble than they’re worth in terms of the effect on affordability, which is very minimal,” he said.
Eby’s government contends the new tax will draw in an additional 45 million, which they further claim will be spent towards housing initiatives.
Ogmundson disagrees, saying would-be sellers who don’t qualify for an exemption but are near the end of the two-year window may be tempted to wait it out.
“It’s a very real risk that because of the way this policy is written, how it discourages potential listings, that you could end up with prices higher than they would have been otherwise,” he said.
He went further, predicting this new tax will actually cost the government upwards of 20 million thanks to owners holding off selling their homes, thereby reducing property transfer tax revenue, coupled with the increased administration costs of running the program.
I tend to agree with him for the most part.
Homes sold inside 2 years represent only 10% of overall sales, and with the long list of proposed exemptions, it’s going to have a pretty limited scope, but adds unnecessary complexity to an already overly complex process, and I believe that anything that limits choice in a marketplace without very clear positives is probably not worth the squeeze.
It doesn’t preclude investors from buying units, say pre-sales, and then renting them out until the 2 year period ends before then selling them.
It’s also going to reduce options for buyers. A recent study in the wall street journal found that 77% of buyers only want turn-key properties. They don’t have the money, time, or skills to fix up a home.
This will impact the folks that do.
Like it or not, renovators bring a valuable service to the marketplace. They take run down, often times unlivable homes, and renew them into turn-key homes.
This tax will further disincentivize this practice.
On the flip side, if you have a home in need of repair, your potential buyer pool has now been shrunk.
Could the “Home Flipper” Tax Increase Substandard Rentals?
I also believe this could potentially lead to a new class of slum rentals, where a landlord will simply refuse to do any updates to a property, rent it out until the 2 year window expires, “reno-vict” those tenants, and then carry on with the flip anyway; Just delaying the inevitable.
Is More Government the Answer?
Lastly, I believe this represents a further unnecessary incursion by government into our personal lives.
The thought of having to prove to someone that you’re exempt, like going through a divorce or losing your job, while trying to dispose of your own personal property feels wrong to me on many levels. It’s noone’s business but your own.
This, in my humble opinion is another example of top down bureaucratic thinking and policy that got us into this problem in the first place, and again fails to address the underlying core issue.
The issue being the significant imbalance between the supply of housing, and the demand willing to purchase said supply.
At present, the permitting process on even a basic single family home in the greater Vancouver area takes upwards of 18 months. This was only a few weeks 2 decades ago, and I have yet to hear an acceptable argument for this 20 fold increase.
Rather than doubling down on further restricting the marketplace and it’s ability to self-regulate and find equilibrium, we need to allow the invisible hand to do what it does best. If you’re unfamiliar, look up Adam Smith’s “The Wealth of Nations”.
Look, at the core of it, we have too many people to the number of homes.
Restricting the ability to freely trade doesn’t increase the number of homes, or reduce the number of people needing homes. It definitely gives politicians something to do though.
But that’s just my opinion. I’d love to hear yours. What did I get wrong, anything you’d like me to elaborate on?
The more dialogue we have on these complicated and sensitive topics, I believe the better we’ll be able to come up with real, tangible solutions, so fire away!
And if you’re looking to discuss all things Fraser Valley Real Estate, whether that’s buying, selling, or investing, I’m here to help you accomplish your real estate goals.
