Anecdotes and Advice from a First Time Home Buyer Part 8 – Condos and Taxes

by Mike Holman

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My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally. See Part 7 – A Close Call.

Condo Show

After a dismal period of viewing unappealing and expensive properties, we decided to attend the Metro Toronto Condo Show just to gauge our options. It seemed like a good way to learn about the basics of a condo purchase. And admittedly, a new or near-new development is appealing in that it would be maintenance-free and likely decorated in our style.

If we hadn’t already been aware of the target demographic for many of the new condos, the Condo Show was attended mainly by early 20-somethings and to a lesser extent, retired empty nesters. The show added little to our knowledge as we had already done some research. There were only a few condo representatives on hand, and they had little hardcopy information. The free condo magazine was useful, but much of the information it contained was already online as well. The majority of exhibitors represented flooring, closet and furniture retailers.

What we were able to take away from the experience was that the newer buildings tended to have smaller units. The luxury condos offered larger units and a more mature crowd, but had heftier prices. On the whole, many of the more affordable buildings did not suit us in terms of their locations in the Entertainment District, along the Harbourfront or in Liberty Village. Buildings in the neighbourhoods we do like are not necessarily cheaper than a house. The main advantage is that condos are move-in ready. Older resale buildings do seem to offer larger units so may be the route we choose.

Municipal Land Transfer Tax

It was with great anxiety and inevitability that I read about the approval of the municipal land transfer tax on October 22, 2007. The tax will be levied on Toronto home buyers and is paid in addition to an Ontario Land Transfer Tax.

Just what are the implications of the new tax? It comes into effect on February 1, 2008 and will work on a sliding scale according to the purchase price. Therefore, a $500,000 home would be taxed at three different tax levels.

Home Purchase Price

Toronto Land Transfer Tax

up to $55,000

0.5%

$55,001 to $400,000

1%

over $400,000 (for one or two-family residential properties)

2%

over $400,000 to $40 million

(commercial properties and multi-residential units)

1.5%

over $40 million

1%

The exceptions to the new tax are for homes purchased with a signed legal agreement by December 31, 2007 even if the closing date falls after February 1, 2008.

First-time home buyers receive a tax break by way of a $3,725 rebate for properties costing up to $400,000. The portion of the purchase price which exceeds $400,000 is still taxed at 2%. In effect, that means that first-time home buyers of properties costing less than $400,000 are exempt from the tax.

While conscious of the looming December 31, 2007 deadline, we are still at the mercy of market availability. After all, a house is too large a purchase to make rashly just to save some money.

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{ 10 comments… read them below or add one }

1 Mr. Cheap

I would recommend (if you’re open to suggestions from weird people on the Internet) that you consider:

1) Wait until the tax has gone into affect. People are in a buying frenzy right now, and post-tax there should be a slump – this means buying opportunities! Since you’re a first time buyer and you get a discount on the tax, this should be a powerful combination for you (desperate sellers, no buer competition, and a tax rebate)

2) If you decide to go the condo route, look into older buildings. While not as trendy, they seem to be larger and in more established areas.

3) Realize that sometimes a home is a “starter” and you won’t necessarily be sending the rest of your life there. Get into a place that meets SOME of what you want for a price you can afford adn start paying down the mortgage (with hopes of upgrading 5 years down the road).

Good luck, thanks for all the posts, its been a great series!!!

2 telly

Good advice Mr. Cheap but I would have to disagree a bit on #3). Upgrading in 5 years is generally very costly (realtor costs, closing costs, transfer taxes, early mortgage termination or transfer, moving costs, opporunity costs of your downpayment and mortgage payments over significantly lower rent costs, etc., etc.), especially in markets that have been rising very quickly.

With some of the markets today (Vancouver, Calgary, some trendy areas in various cities), you have to think they will come down at some point, and what if that point is 3 years from now? Just ask some of our neighbours down south that were planning to sell their “starter” home to upgrade this year and find themselves in a position where their home is worth very little more (and in many cases, LESS) than when they purchased a few years ago.

Like stocks, I think 5 years is far too short for real estate investment, especially given current RE market conditions (overvalued in most Canadian cities imo).

My suggestion to Christine (and I know it’s probably not what she wants to hear!) is that they strongly consider continuing to rent. Her “what to buy” post indicated that they require a house with 3 bedrooms and two baths, and close to the subway (Annex or Yound St. corridor) with a budget of $500-600k. Moving into the condo market sounds to me like they are comprising many of their wants because they are afraid they are going to miss out. This sounds like a lot to give up for a similar price tag…one that will likely be the single largest expense they will have for the next 25 years (or perhaps longer!)

3 Mr. Cheap

telly: Yeah, you’re probably right. I personally wouldn’t go through the “upgrade every 5 years” route, but it seems like other people recommend it (and you’re right that the transactions costs are going to gobble up a lot of your appreciation).

I think far too many people think home ownership iss the only path to wealthy, and you’re right that renting is well worth considering (as long as you look into other investment options instead of just pouring the extra cash into your lifestyle).

As always, I defer to you ;-P

4 FourPillars

Telly – you make a good point but I don’t know if someone should buy a house they have a hard time affording just so they don’t have to upgrade in five years.

I think everyone should buy a house they can afford and that’s that. If it’s not their dream home then too bad.

Mike

5 telly

Mike,
I totally agree, that’s why I suggested continuing to rent. I wouldn’t want anyone to misinterpret what I meant! Spreading yourself thin to afford your dream home is a much worse prospect than upgrading in 5 years, although neither is ideal.

Oddly enough, we bought a home that was significantly cheaper than what we could afford and we thought we’d upgrade in 3-4 years (it’s been that long since we purchased). Turns out we like it quite a bit and think we’ll stick around.

Like you said on another thread somewhere, it’s not the “house”, it’s the people inside it that matter. Not spreading yourself thin means less stress and more time to enjoy your “home”.

6 Mike's Wife

Telly, did Mike really say that? He must have temporarily blocked out the year spent in my little tiny starter home…

7 FourPillars
8 telly

Lol, nice catch Mrs 4P. :)

9 Warren

That Toronto land transfer tax is a real kick in the balls, I hope Vancouver doesn’t go the same way. We already have a 2% (I think) BC provincial LTT.

Is it exempt for first time buyers? The provincial LTT in BC is.

And of course don’t forget GST! There’s a rebate for first time buyers, I think I paid 3 or 4 % back when GST was 7% on my first condo.

10 FourPillars

Warren – first time home buyers are exempt up to $400k. So they still pay 2% tax on any amount above $400k.

GST rebate is only applicable to new construction and the limit is $450k sale price.

Mike

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