The biggest news from the 2024 Budget released last month is that the State Government will soon implement a resale tax, first proposed by State Premier David Eby during the 2022 election campaign.
The new resale tax applies to gains from the sale of residential property held for less than two years, with rates varying depending on the amount of time that has passed.
The tax rate is 20% if the property is held for 365 days or less, and gradually decreases between 365 and 730 days.
While legislation on the resale tax has yet to be introduced, the state has announced that it will go into effect on Jan. 1, 2025, and will apply to homes purchased before that date.
Tax rate inversion. (British Columbia)
To account for unusual circumstances, the state also provides a series of exemptions for life circumstances that may result in the sale of property within two years, including divorce or separation, death, disability, illness, job relocation, involuntary unemployment, changes in household structure, personal safety, and bankruptcy.
Additionally, individuals who sell their home within two years of purchase can deduct up to $20,000 when calculating their taxable income, taking into account “resales” that are not for profit and do not qualify for the exemption. The state also states that it provides an exemption to “anyone who increases the housing supply or who is engaged in construction or real estate development,” noting that the aforementioned exemptions are not an exhaustive list.
How big of an issue is resale?
The ongoing debate over the proposed resale tax is both about whether resales are truly a negative for the housing market and whether it's such a big enough problem to justify a new tax.
Home flippers are no different than other goods flippers. They think they can buy goods at a good enough price that they can quickly resell them to others for a profit. Making a profit reselling things like trading cards is one thing, but making a profit reselling everyday necessities is another. To give one example, people were stocking up on hand sanitizer and toilet paper to resell during the early months of the COVID-19 pandemic.
The province sees home flipping as more of the latter, and David Eby has consistently voiced his ire at speculators. While the argument is that flippers damage the market by inflating prices, the BC Real Estate Association (BCREA) argues in a recent analysis that “the extent to which flippers actually drive up home prices remains unclear, both theoretically and empirically.”
BCREA says it's unclear whether flippers are causing price inflation or whether flipping is attractive to these people because there is already natural price inflation in the market – i.e., the chicken came before the egg. BCREA also notes that an argument can be made that flippers make the search process easier for long-term buyers by effectively staging and selling properties, and that they also improve the quality of existing inventory by renovating homes before reselling them.
The province recently announced that about 7% of homes sold in British Columbia between 2020 and 2022 were resold within two years. Looking at this statistic, BCREA found that using data from the Canadian Housing Survey, the majority of these “flips” in British Columbia were the result of living situations that exempt the province from resale taxes. The bottom line is that just under one in 50 home sales, or 2%, fall into the speculative flipping category the province is targeting.
What impact will resale taxes have?
Using statistical modeling, BCREA concluded that the implementation of a resale tax would reduce home sales by about 1.7 percent over a three-year period, and it also found that the tax could have several unintended consequences.
The first concerns the resale market.
“Government measures banning sales within two years of purchase will likely cause some potential sellers to delay listing their properties,” BCREA noted. BCREA hypothetically set this delay at one year in its modeling, but it could be longer, which could result in fewer new listings in the short term and fewer active listings in the longer term, which could have various repercussions of its own.
“Given these supply-side effects, a decline in active listings will encourage a tightening of the market, leading to higher prices and higher price expectations,” BCREA said. “As a result, higher prices will attract more investors to the market, offsetting some of the tax's disincentive.”
BCREA concludes that even a 5% to 10% decline in the number of new listings would negate the positive impact, if any, the proposed resale tax would have on home affordability.
Impact of listing delay on sales and prices. (BCREA)
The second unintended consequence relates to the presale market, where sales are referred to as “contract assignments.”
As for how the proposed resale tax would apply to the presale market, sales and marketing firm MLA Canada points out that the tax's two-year period starts from the date the presale agreement is signed, not the date construction is completed and the deal is closed. It also points out that the two-year period does not reset at the latter point.
“This approach seeks to encourage early investment in presale projects and minimise contract assignments, where contracts are transferred before the project is completed. Contract assignments are often at a higher price,” MLA Canada said. “If a presale contract is transferred to another purchaser, the transferee's acquisition date will be the date of transfer and tax on the gains may be levied. If a presale contract is transferred to another person before the two-year period has expired, tax will be applicable on the gains and the rate of tax will be determined based on the period from the time of contract signing to the time of transfer.”
MLA Canada concludes that the proposed resale tax would have “negligible” impact on the presale market. While there may be an increase in transfer resales toward the end of the year before the tax goes into effect on January 1, 2024, the association notes that in a typical presale project, only about 2% to 5% of units involve third-party transfers. Moreover, because construction periods often exceed two years, the resale period is largely irrelevant, and transfer resales could still occur without the tax being triggered.
A larger impact the proposed resale tax could have, both MLA Canada and BCREA say, is that it would deter investment in new home construction.
“Taxing these buyers could scare them away and reduce new home development overall,” MLA Canada said, while BCREA said it “could also reduce liquidity in the pre-sales market, hindering financing for new housing projects.” Both said it could lead to a reduction in housing supply in the long term.
Tax reform
Another aspect of the debate about whether British Columbia needs a resale tax is that related measures are already in place.
The Canadian government introduced its own home resale regulations in the 2022 Budget. Before the regulations came into effect in 2023, profits from the sale of a home that was not a person's primary residence were taxed as ordinary capital gains, with 50% of the profit treated as taxable income. With the new regulations coming into effect, the profit is now treated as business income, with 100% of the profit treated as taxable income.
A review of federal resale measures found no conclusive evidence that they have discouraged resales or increased home prices, and “there was no indication that they have caused even a small decrease in sales of properties purchased within the last 12 months,” the BCREA said.
BCREA also pointed to other jurisdictions around the world that have enacted similar anti-resale measures, including the United States, Australia, New Zealand and Singapore, and concluded that these measures have also not resulted in any noticeable change.
Whatever the impact, property flips are already subject to a federal resale tax, but only for a year, and B.C.'s proposed resale tax would be in addition to that.
State officials say the proposed resale tax would “complement” existing state efforts to combat speculation, such as a speculation and vacancy tax, which the state says has put more than 20,000 homes back on the market. State officials acknowledge that a resale tax is no panacea, but they believe it's still necessary to discourage speculators.
“Families looking to buy a home should not have to compete with home flippers,” said Premier David Eby. “This tax will deter speculators and give home-hunting families an advantage in the housing market.”
A proposed resale tax bill is expected to be introduced this spring, but only time will tell if the benefits trickle down to families and what other impacts the tax may have.