When you buy a home, it becomes your castle. In theory, it should be yours to keep or sell whenever you wish for any reason. Nevertheless, there are regulations about nearly everything, especially in real estate.
The rules are due in large part to a critical lack of housing in Canada. No matter who is in charge, the government is under fire to create policy that dissuades people from buying up homes and selling them for a fast profit. Clients often ask us “how soon can I sell my house after purchase?”
Technically, you can sell a house whenever you want, but it could cost you more than you realize. Today, we’ll answer the most frequent questions about what happens if you buy a house and put it back on the market too quickly.
Do you want to simplify the home selling process? We have a guide for that! Download your copy right here.
How Soon Can You Sell a House After Buying It (Canada)?
To avoid a tax penalty, you should generally wait at least a year. Otherwise, you might find yourself on the wrong side of the recently enacted Residential Property Flipping Rule. This legislation was approved in 2023, and it states that any profit from selling a house after owning it for less than 12 months is automatically treated as business income, not just a capital gain. This means 100% of your profit is taxable, not just 50%. Even the Principal Residence Exemption (PRE) doesn’t help you in this case.
Some exceptions could apply if you have significant extenuating circumstances. There could be reasons why you might want to sell your house almost immediately after buying it. Examples could include a sudden serious injury or illness, a death in the family, breakdown of a marriage, or a threat to your personal safety due to an undisclosed latent defect.
You can appeal to the Canada Revenue Agency in some instances to alleviate the penalty. Ideally, an exception will be granted to allow you to claim the Principal Residence Exemption after all. The second best scenario is that they treat any profits as capital gains rather than business income. You’d still be taxed, just not as severely.
Looking for more tips to sell your home in Guelph or the Tri Cities? You’ll find plenty in the posts below:
- When Is The Best Time To Sell A House?
- Why Landscaping Matters When Selling Your Home
- How Much Does It Cost to Sell a House in Ontario?
What Is the Penalty for Selling Your House Early in Canada
Let’s imagine the worst-case scenario where you are selling a house within a year in Canada and no exception is given. You can’t use the PRE and must claim any profits as business income.
Depending on the final selling price and your income, the tax penalty could be quite costly. If you earn $50,000 profit from the transaction, add that to your income that year. Those extra earnings could push you into a higher tax bracket and substantially increase the amount you owe.
Mortgage Penalty: Selling Before 5 Years
Increased taxes are not the only consequence you might face when selling your house early. Many lenders also have a penalty for selling a house before the mortgage term is up, usually 5 years. The amount depends on a few factors, such as how much time is left in your contract, the amount still owing, and the type of loan that you have signed up for.
- Open mortgages often come with higher interest rates. However, there is little to no penalty for breaking them early.
- The penalty for variable mortgages tends to be moderate, usually three month’s worth of interest that the lender would have earned.
- Breaking a closed, fixed-rate mortgage can be very expensive, especially when you are early in the term. The lender will either charge an Interest Rate Differential or three month’s worth of interest, whichever is greater. (The IRD is the difference between the interest rate you locked in originally and the current interest rate for what would have been the remaining time on your term.)
Should you invest in real estate? The posts below will give you food for thought:
- The Go Wylde Guide to House Flipping
- How to Generate Passive Income From Your Primary Residence
- Growing Your Wealth Through Real Estate Even in a Recession
Other Costs of Selling a House Early
It isn’t just mortgage penalties or taxes you need to consider when buying a house only to sell it almost immediately. Think of all of the closing costs associated with both ends of that transaction.
Land transfer taxes are significant, and it can be hard to recoup these costs without allowing for the natural appreciation of the property. In addition, you’ll essentially double your legal fees, appraisal costs, home inspection fees, and moving expenses.
Plus, selling a home quickly can have intangible costs you may not expect. You’re at the mercy of short-term pricing fluctuations, and returning to the market too quickly can make buyers suspicious, which impacts your home’s resale value.
While life can happen, it is best to plan for the long term whenever possible. A knowledgeable real estate agent can help you secure a home that works for you where you can be comfortable and happy as you build your equity over time.
Are you planning to buy or sell a home this year? Our top Guelph real estate agents are here to answer all of your questions. Reach out today at info@gowylde.ca or call 519-826-7109 for more information
