Should I sell My Assignment or Close On the Purchase?
Should you close on your assignment or sell it prior to taking possession?
There is no cookie-cutter answer to this question, as it is very much dependent on your personal situation.
However, there are several factors to consider when evaluating both options:
Selling Your Pre-Construction Contractor (Assigning)
Unfavorable tax consequences (Capital Gains) – Selling an assignment is considered a taxable event. Depending on the nature of your business transactions (and real estate), the CRA may deem you to be ‘trading’ in real estate, and thus, similar to a gain on a stock purchase, you may be required to be capital gain taxes on your purchase.
Example: Let’s say you have a $100,000 gain (after all fees) with assigning your pre-construction unit. The Capital Gains rate is 50% and assuming a 30% tax rate, you would owe the CRA the following:
$100,000 (Profit) x 50% (Capital Gains Rate) x 30% (Tax Rate) = $15,000 in taxes related to capital gains
Unfavourable tax consequences (HST): As part of the Budget 2022, the Government reinforced the wording to make it more clear that the profit component related to the sale of an ASSIGNMENT is subject to HST. As an example: $100,000 Profit will result in a $13,000 tax bill related to HST.
Diversification – Despite the tax implications, selling an assignment can make sense from an investment point of view as it relates to diversification.
Many of our clients, own their principal residence, a rental property, and diversify their portfolio through pre-construction and the benefits of locking in a purchase price today and using the time value to build their wealth.
Closing on Your Pre-Construction Property
- Mortgage required – Depending on your personal situation this may or may not be possible
- Better tax implications – Generally speaking, closing on a pre-construction property for your principal use will not result in capital gains tax or HST.