There are 2 big costs that are associated with selling on Assignment that most people don’t know about. When you are buying your unit on pre-construction and selling in a few years from now before occupancy, as an investment, you want to make sure you are number crunching to see your net net net profit. Now what 2 big costs are associated with selling on assignment?
When you are flipping your unit on assignment you must pay Harmonized Sales Tax (HST). What is HST payable on? HST is payable on the profit portion of your sale as well as your original deposit portion of the sale.
Here is an example, you’ve got a pre-construction unit you bought at $500,000 and have paid 20% down ($100,000). Fast forward 3 years and your unit is now worth $700,000. You decide to flip this unit and sell for $700,000. The HST payable will be due on the original $100,000 as well as the profit of $200,000.
HST payable will be:
13% x $100,000 = $13,000
13% x $200,000 = $26,000
$39,000 will be due in HST on your Assignment sale.
2. Capital Gains/Income Tax
Capital gains tax is only 50% taxable but a business income, the money you made from an assignment sale is considered to be 100% taxable. For a $200,000 income, the marginal tax rate is around 40%. The calculation on your $200,000 profit in the example above would be:
$200,000 x 40% = $80,000
Assignment sales are great and many investors use this tactic to be able to have hands free investments, but you must understand the potential costs involved in flipping on assignment to see if it is right for you. On the other hand, when you are flipping your unit on assignment you are saving on closing costs because the buyer will have to pay that not you. There are pros and cons to flipping on assignment, contact us today and we can give you the run down of all your expenses and how you can leverage and stretch every dollar you put in!