Taxation and the middle class

[tomh009]

The new higher capital gains rate only kicks in after $250K in gains (and appreciation of primary residences is not taxed, of course) so a $10K savings would require the unit to have appreciated by something like $370K; that amount would result in $20K additional taxable income and something like $10K in taxes. I don't think there are many investment condos that have appreciated that much. Maybe duplex/triplex houses, but I don't think it would significantly impact the number of listings at the moment.

Are you sure? We bought our condo in 2018 and sold it in 2022 and our condo went up >200k in value, and ours was extremely cheap at the time, the same percentage increase for a more expensive unit would easily hit 370k, and I think property has still been going up since.

The first of the big new buildings, Charlie West, didn't hit occupancy until 2021. The second (taller) Garment tower was about the same. So, people buying these units would have likely missed the rise in real estate prices, as the prices have largely stalled post-pandemic. (The pre-construction prices projected those increases already so no bargains there.) You can confirm this by comparing current asking prices with the pre-construction ones.

[tomh009]

Also, $370k in appreciation since 2018 doesn't seem that unlikely. Maybe not on a studio, but the small 2bd layout was very popular with investors at Charlie West. I think that would be up $370k since 2018.

Do you happen to have a Charlie West price list? I don't have one, so no way to check the appreciation.

In 2021 (the first data I can find) Charlie West units in the 700-750 sqft range sold for $500-550K. The asking prices for similar units today are in the same range. I find it hard to imagine that the prices went up 50% from pre-construction to (initial occupancy in) 2021.

Of course, multi-unit investors can still be impacted if they sell multiple units in one year. Selling one, much less likely.

[taylortbb]

Do you happen to have a Charlie West price list? I don't have one, so no way to check the appreciation.

In 2021 (the first data I can find) Charlie West units in the 700-750 sqft range sold for $500-550K. The asking prices for similar units today are in the same range. I find it hard to imagine that the prices went up 50% from pre-construction to (initial occupancy in) 2021.

I do, still in my email from my purchase. I'm seeing a 734 sq ft 1bd on the 5th floor listed as $285k. Prices went up more than 50% from Jan 2018 (pricelist date) to occupancy in 2021.

Back then $550k bought you one of the larger penthouses with over 1300 sq ft. Though all the price list prices exclude parking, which was a $40k optional add-on.

[tomh009]

Thanks! They were cheaper than I remembered!

[taylortbb]

Thanks! They were cheaper than I remembered!

Yeah, if Momentum had waited 6-12 months they could have sold the units for a lot more. Charlie West took 6+ months to sell, while Garment Street T3 sold in a few hours less than 6 months later. As an owner at Charlie West I'm sure not complaining though, I remember worrying I'd over paid. Instead I got in just in time.

[Bytor]

Many investors own multiple units

And therein lies the rub.

If somebody was that well off to be able to buy multiple condos or single-family houses, the extra capital gains tax is not hurting them in any way.

But they were part of the reason why housing got so outlandishly expensive by participating in the speculation to buy multiple extra properties like that.

Zero sympathy. Let's go back to the high marginal tax rates on the rich from the 1950s and 1960s. (And, no, "capital flight" doesn't really happen.)

[Rainrider22]

Many investors own multiple units

And therein lies the rub.

If somebody was that well off to be able to buy multiple condos or single-family houses, the extra capital gains tax is not hurting them in any way.

But they were part of the reason why housing got so outlandishly expensive by participating in the speculation to buy multiple extra properties like that.

Zero sympathy. Let's go back to the high marginal tax rates on the rich from the 1950s and 1960s. (And, no, "capital flight" doesn't really happen.)

Um,  you are off base.  My wife and I purchased a couple of condo units that we rent out.  This was done as retirement investment for her as she does not have a pension plan through work.  We are by no means wealthy.  We live in a semi, we made choices to not keep buying up on our residence in lieu of purchasing investment properties for her future.  I know many people that have done this.  The only people that are going to be hurt by this is the people like myself.  People who own many condos units for rent have them owned under a corporation.  Therefore they don't pay tax in the same manner, they will be just fine and unaffected by this tax grab.

[panamaniac]

More accurately a reduced tax benefit than a "tax grab".

[bravado]

Or “bringing investment up to similar taxation levels as income”

[jeremyroman]

And therein lies the rub.

If somebody was that well off to be able to buy multiple condos or single-family houses, the extra capital gains tax is not hurting them in any way.

But they were part of the reason why housing got so outlandishly expensive by participating in the speculation to buy multiple extra properties like that.

Zero sympathy. Let's go back to the high marginal tax rates on the rich from the 1950s and 1960s. (And, no, "capital flight" doesn't really happen.)

Um,  you are off base.  My wife and I purchased a couple of condo units that we rent out.  This was done as retirement investment for her as she does not have a pension plan through work.  We are by no means wealthy.  We live in a semi, we made choices to not keep buying up on our residence in lieu of purchasing investment properties for her future.  I know many people that have done this.  The only people that are going to be hurt by this is the people like myself.  People who own many condos units for rent have them owned under a corporation.  Therefore they don't pay tax in the same manner, they will be just fine and unaffected by this tax grab.

I don't think "zero sympathy" is fair here, but having substantial ownership of at least three homes is more than a lot of people have. On the one hand, this change will be a setback -- though since you presumably intend to sell it in retirement (i.e., with substantial room below the maximum marginal tax bracket), it probably amounts to a significant but not devastating impact. For example, if a single condo has appreciated from $300,000 to $600,000, then this change results in an additional 17% inclusion on the last $50,000 gain (above the $250k limit in one year) -- i.e., an additional $8,333 of taxable income, which is at most $4,460 in additional tax (at least $3,747). On the other hand, this doesn't wipe out the substantial windfall that the housing market appreciation has delivered the past several years, and has harmed the retirement prospects of many others. I expect this could be softened further (or eliminated entirely, e.g. in the case of 50% ownership and a gain of less than $500k) if the ownership is split across multiple household members, but I am not a tax accountant. Still, of course this change does affect people who are not in the yacht-owning class.

For corporations this applies on the first dollar of capital gain, though of course corporations have some additional tax planning tools to mitigate that somewhat (mainly in the form of deferral).

It's also probably the case that the fact that so many people have done this (putting their retirement savings into multiple residential investment properties, with the expectation of outperforming other investments) has bid up the cost of housing and is a contributing factor to housing affordability. That doesn't mean that individuals/families involved deserve to be "punished" in a moral sense (everyone is largely following everyone else's general wisdom that it's a prudent thing to do, which has paid off handsomely for decades), but it might not be the incentive structure that is in the interest of the public as a whole.

[tomh009]

Um,  you are off base.  My wife and I purchased a couple of condo units that we rent out.  This was done as retirement investment for her as she does not have a pension plan through work.  We are by no means wealthy.  We live in a semi, we made choices to not keep buying up on our residence in lieu of purchasing investment properties for her future.  I know many people that have done this.  The only people that are going to be hurt by this is the people like myself.  People who own many condos units for rent have them owned under a corporation.  Therefore they don't pay tax in the same manner, they will be just fine and unaffected by this tax grab.

Corporate inclusion rate also goes to 66%, with no exemption. And people earning income through working have a 100% inclusion rate, so I think 66% inclusion after $250K of capital gains is not so onerous, whether you are investing in stocks or real estate.

You can certainly mitigate the impact if you hold the real estate jointly as you will only claim 50% each. A $500K total gain on a condo or a house would still have only $250K of it taxable; a $800K gain (for example) would result in a slightly higher inclusion rate of 56%. Not onerous--that's the inclusion rate, not the ultimate tax rate--and arguably fair in the bigger picture. You just need to do your tax planning, hold the properties jointly and not sell more than one in any given year.

[danbrotherston]

Um,  you are off base.  My wife and I purchased a couple of condo units that we rent out.  This was done as retirement investment for her as she does not have a pension plan through work.  We are by no means wealthy.  We live in a semi, we made choices to not keep buying up on our residence in lieu of purchasing investment properties for her future.  I know many people that have done this.  The only people that are going to be hurt by this is the people like myself.  People who own many condos units for rent have them owned under a corporation.  Therefore they don't pay tax in the same manner, they will be just fine and unaffected by this tax grab.

Corporate inclusion rate also goes to 66%, with no exemption. And people earning income through working have a 100% inclusion rate, so I think 66% inclusion after $250K of capital gains is not so onerous, whether you are investing in stocks or real estate.

You can certainly mitigate the impact if you hold the real estate jointly as you will only claim 50% each. A $500K total gain on a condo or a house would still have only $250K of it taxable; a $800K gain (for example) would result in a slightly higher inclusion rate of 56%. Not onerous--that's the inclusion rate, not the ultimate tax rate--and arguably fair in the bigger picture. You just need to do your tax planning, hold the properties jointly and not sell more than one in any given year.

Lol...leaving aside the tax esoterica, the idea that a person who owns three properties is "by no means wealthy" is just silly. Are they Bill Gates, no. Are they wealthier than the average? Obviously. Are they in the top quartile. Also almost certainly so. Are they in the top 10%, likely. Are they in the top 1%...iffy...

So yeah, I don't know why people are so unwilling to admit their wealth?

[ijmorlan]

Another question: does the new rate apply to the whole gain (exclusive of the $250,000 exemption), or only on the portion that accrues after the new rules come into effect?

For example, buy property in 2004 for $100,000, property is worth $200,000 now, sell in 2034 for $250,000.

New rules on $150,000 of gain, or old rules on $100,000 and new rules on $50,000?

(of course, the whole concept of the value of a property that is not sold is inherently problematic, but the tax code already provides for such values to be used e.g. when a property changes use)

(although the explanatory notes don’t explain. For example, when explaining how to calculate taxes on a rental property, at a certain point it blithely says to write the value of the land in one place and value of the building in another, as if each property has a big pricetag on it that breaks down its value into land and building components)

This relates to a valid concern about changes of this nature: if someone has planned based on the rules that have been in effect, new rules may have a significant negative effect on them, and characterizing everybody affected as wealthy and therefore not worthy of concern does not change the fact that a middle class person can easily have a small number of significant assets by the time they retire.

[panamaniac]

Another question: does the new rate apply to the whole gain (exclusive of the $250,000 exemption), or only on the portion that accrues after the new rules come into effect?

For example, buy property in 2004 for $100,000, property is worth $200,000 now, sell in 2034 for $250,000.

New rules on $150,000 of gain, or old rules on $100,000 and new rules on $50,000?

(of course, the whole concept of the value of a property that is not sold is inherently problematic, but the tax code already provides for such values to be used e.g. when a property changes use)

(although the explanatory notes don’t explain. For example, when explaining how to calculate taxes on a rental property, at a certain point it blithely says to write the value of the land in one place and value of the building in another, as if each property has a big pricetag on it that breaks down its value into land and building components)

This relates to a valid concern about changes of this nature: if someone has planned based on the rules that have been in effect, new rules may have a significant negative effect on them, and characterizing everybody affected as wealthy and therefore not worthy of concern does not change the fact that a middle class person can easily have a small number of significant assets by the time they retire.

I don't think that has been made clear yet, but the impression is that will apply to the whole gain ( reduced by all eligible deductions).

[tomh009]

Another question: does the new rate apply to the whole gain (exclusive of the $250,000 exemption), or only on the portion that accrues after the new rules come into effect?

I don't think that has been made clear yet, but the impression is that will apply to the whole gain ( reduced by all eligible deductions).

That would only work if you have in some way crystallized (and paid taxes on) the capital gain prior to the new rules coming into effect. When you sell an asset, you will always pay taxes on (the included part of) the capital gain, which is the selling price less the acquisition costs, regardless of when it was acquired.