March 7, 2024 BC’s New Flipping Tax and the Implications on Presale Investments

In late February, the provincial government announced its intention to institute the BC home flipping tax, set to take effect on January 1, 2025. The tax, part of the Provincial Budget 2024, targets income from properties sold within two years of purchase in British Columbia, aiming to discourage short-term speculative property flipping as part of the Homes For People plan. Still requiring legislative approval, the tax is distinct from federal property flipping rules and uses a descending rate over time: 20% for properties sold within a year of purchase, tapering to zero between one and two years. 

Eligibility for exemptions exists under certain life circumstances, such as divorce, death, and job loss, with a notable provision allowing up to $20,000 of income from the sale of a primary residence within two years to be exempt. This approach seeks to balance the tax's intent to curb speculative buying and selling with the need to accommodate genuine housing transitions. The tax covers properties with residential units or those zoned for residential use, including assignable purchase contracts, but exempts income from sales on reserve, treaty, and self-governing Indigenous lands, emphasizing support for housing supply and development. 

Premier David Eby describes the flipping tax as part of a broader strategy to address housing issues, emphasizing its role in reducing speculation and making housing more accessible for families. Eby hopes the tax will deter flipping activities, ideally reducing the tax revenue to zero, reflecting a desire to eliminate speculative behaviour rather than generate income. 

What would this flipping tax mean for presale homebuyers? 

The introduction of the flipping tax has specific potential applications for presale home buyers. Notably, the tax's two-year window of applicability starts from the date a presale contract is signed, not when the property eventually completes construction and is closed. This means that for presale buyers, the acquisition date is considered the day the presale contract is signed. This two-year window does not reset upon the property's closing. 

This approach encourages early investment in presale projects and seeks to minimize contract assignments, where contracts are transferred before project completion, often at a higher price. If a presale contract is assigned to another buyer, the acquisition date for the assignee is the date of assignment, potentially subjecting them to the tax on profits. When a person assigns the presale contract to another person before the two-year mark, the tax would apply on any profit and the tax rate will be based on the time between when they entered into the contract and when they assigned it. Developers' income from selling presale contracts, however, is exempt.  

Industry criticisms of the new policy 

Industry experts immediately presented criticisms of the tax as it currently stands, suggesting that the costs might outweigh the benefits. The tax is seen by some as politically motivated to appease a particular voter base but is argued to overlook the broader issues affecting housing affordability. Flipping represents a small portion of total transactions and broader structural issues are the main drivers of the housing market's problems; comprehensive solutions are needed to address the accumulated and significant housing wealth created from rising house prices in recent years. While the targeting of house flippers is acknowledged, the tax is criticized for potentially having unintended consequences on presale buyers and the overall supply of new housing. Taxing these buyers could deter investment out of fear and thereby reduce the amount of new housing being developed overall; sellers might delay their sales more strategically to avoid the tax, which could inadvertently increase housing prices. The possibility of exemptions for presale buyers has been mentioned as a consideration that may need to be addressed. 

Little impact on presale – and on supply issues 

We may see increased investor assignment activity toward the end of 2024, as the tax comes into play at the start of 2025. Between 2% and 5% of units at a typical presale project seek third-party assignment (those not assigned to a family member or related party such as a spouse or parent). 

“We anticipate the number of assignments to be reduced by the new policy, but overall, presale projects will see little impact,” shares Garde MacDonald, Director of Advisory at MLA Canada. “With the ‘clock’ starting at the contract writing stage of a presale purchase, rather than at construction completion, the two-year flipping window will be irrelevant for many buyers as construction timelines range from two to four years. Given the exemptions, assignments can still occur without triggering the tax.” 

MacDonald predicts that assignment activity will marginally reduce overall, but does not expect a marked change to sales, absorption, or general interest in presale projects as a result of this new tax. “Ultimately, similar to other real estate taxes, this new flipping tax will not help more homes get built in BC. Our overarching supply issues persist and this feels like a drop in the bucket (and the wrong bucket) compared to the core issue of lack of supply.” 

The provincial government is, at the very least, making a deliberate effort to temper speculative real estate activities and promote housing stability. The tax's implications for presale buyers, who face the start of the tax window from contract signing, encourage early investment and aim to reduce speculative assignments. Despite industry criticisms concerning potential unintended consequences on housing supply and affordability, the government views the tax as a necessary step towards a more equitable housing market. However, its effectiveness to support this mission remains to be seen and it is unlikely we’ll solve the complexities of housing affordability through taxation alone. More details on the nuances will be provided when the legislation is released this spring, and we’ll be following along.