Most of the time, when someone buys a house, they live in it for years before the time comes to sell and move on. In some cases, however, that day arrives much sooner than anticipated.
Perhaps the home was just intended as a short-term solution before finding something more permanent. Or maybe life happened, and you must move for personal or financial reasons.
The question is whether or not there are any disadvantages to selling a house too soon after taking possession. In this post, we’ll talk about some of the possible penalties and implications in more detail.
Are you contemplating a home sale and are curious about the process? We are happy to answer your questions at any stage in the process. Start by booking a complimentary, no-obligation consultation with our team.
Government Legislation May Affect Your Decisions
Over the last few years, Canada has been experiencing a housing shortage. Part of the problem is simply not enough physical supply to meet the demand, especially in major cities like Toronto.
Even in a “bad” market where home sales are slow, prices are still high, and there can be competition for the best quality inventory. Real estate speculation is another issue, where people buy up properties with zero intention of inhabiting the home or renting it to tenants. This taxes the already short supply and puts even more pressure on prices.
Existing homeowners who are upsizing or downsizing may have some challenges, but at least they also have equity to protect them. For first-time buyers, it can be very difficult to get into the market. Needless to say, governments at all levels are pressed to find a solution.
Whenever you decide to list your home, earning the highest selling price will empower your next steps. The posts below can help:
- Home Renovation Checklist for Sellers
- Why Move Out of Your Home While It’s On the Market
- How to Sell a Less Than Perfect House
Consider the Tax Implications
The federal government implemented the Residential Property Flipping Rule in January 2023, around the same time as the foreign buyer ban. This legislation affects anyone buying a property only to sell it after owning it for less than one year.
Some exceptions apply for certain life events. Otherwise, any profit you earn will be taxed as business income, even if the home is your principal residence. What’s the difference between business income and capital gains?
Capital gains come into play when selling a second home or investment property that has increased in value from the time of purchase. You’ll add 50% of any gains to your income for the year.
When the profit is considered business income, 100% is taxable under the anti-flipping law, which makes it even more burdensome. You could potentially find yourself facing a hefty tax bill for the year, especially if these gains push you into a higher tax bracket.
Long story short, if you’re going to sell your home, try to wait for at least one year, unless one of the exemptions for extenuating circumstances applies.
Breaking Your Mortgage Early Can Come With Fees
Chances are, you applied for a mortgage when you originally bought your home. Most loan terms last for five years, which is when you can choose to either renew or pay off what you owe in its entirety. Some homeowners can be caught off guard about the costs associated with paying too much too soon.
Believe it or not, most lenders don’t want a lump sum as they rely on interest income. That’s why selling your home and breaking your mortgage contract early can cost you.
- A variable-rate mortgage tends to be the least expensive. If you pay it off early, you’ll typically pay three months’ worth of interest to make up for your lender’s lost income.
- Fixed-rate mortgages can be more costly to break, depending on your contract and how much time is left in your term. It’s usually either three months’ interest or an Interest Rate Differential (IRD), whichever is greater.
If you know you’re going to sell your home before your term is over, it’s important to choose a loan with the most favourable terms for your situation. A knowledgeable mortgage broker is just as essential to your team as a local real estate agent!
Do you plan to buy a house before or after selling yours? The posts below can help you make the most out of both transactions:
- How to Buy a House in Etobicoke Before Selling Yours
- 7 Ways to Prepare to Buy a House
- How Much House Can I Afford in Etobicoke?
Buying and Selling a House Is an Expensive Process
Even without taxes or government interference, buying or selling a home can be expensive enough. When buying, you have the purchase price of Toronto real estate, plus both the provincial and municipal land transfer taxes, along with legal fees and other expenses. Sellers also have their share of closing costs.
If you’re dealing with two transactions simultaneously, these expenses can all add up. Typically, purchasing property is a worthy investment when planning to stay for the long term. When selling a house shortly after moving in, it can be difficult to recoup your investment unless the market has really taken a turn for the better.
The Right Decision Now Can Save You Later
Should you sell your house or should you wait? It depends on so many factors, and not everything is market or tax related. Ultimately, the right time to move is when it aligns with your lifestyle.
When your existing home starts to feel too small, too large, or not quite in the right location, you can begin to think about your options. Whenever you’re ready for a change, an experienced, local real estate agent can guide the way.
Are you in the planning stages of buying your next home? Our Etobicoke real estate agents are here for anything you need. Reach out today at 647-282-7653 or email contact@sileckythompson.com with any questions or to get started.
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