Friday, July 21, 2017

VanRealEstatePodcast #78 | How Owning a Home in Vancouver Could Land You in Jail with Michael Geller

Recently, I've been delighted to chat with others in the real estate community who offer weekly podcasts. While this episode of the Vancouver Real Estate Podcast followed up on my recent column on tax considerations related to laneway housing and basement suites, we also discussed ideas to create more affordable housing, and concluded with some non-real estate Q&A. I enjoyed doing it with a couple of very intelligent interviewers.

I can't bring myself to listening to it, but some of you might find it interesting!

Matt and Adam welcome Architect and SFU Adjunct Professor Michael Geller to the podcast for a chat about the recently implemented City of Vancouver Vacant Homes Tax and other policy changes that could unwittingly affect homeowners in our city and across Canada.

Opinion: Vancouver Courier: New rules could turn Vancouver home owners into criminals July 20, 2017

Could Vancouver’s housing and taxation programs turn otherwise law-abiding citizens into potential criminals? Sadly, I fear they might.
     Be it laneway houses, secondary suites, the Empty Home Tax, or the latest Airbnb restrictions — all have complex legal and tax implications, which are often not known or fully understood.
     In sharing these observations, I should note I am neither a tax accountant or lawyer. Rather, I am an architect and real estate consultant who has long advocated for the legalization of basement suites and laneway or coach houses for rent and sale.
     While I oppose taxes on vacant dwellings for philosophical and administrative reasons, I support new regulations on Airbnb and similar programs since they have negative impacts on available rental housing, condominium living and the hotel industry.
     Many owners of empty or “under-utilized” dwellings also oppose the Empty Home Tax on the grounds it is inappropriate and/or unfair, and intend to sign creative, and in many cases fraudulent leases, to avoid paying the tax.
     However, owners of laneway houses and basement suites could soon be found to be inadvertently or deliberately evading taxes, due in part to the recent Canada Revenue Agency (CRA) decision requiring Canadians to report the sale of a principal residence on their income tax returns, starting in 2017.
     This new rule was meant to reduce tax evasion by closing a loophole exploited by real estate speculatorswho often bought and sold properties tax-free as principal residences. 
     Most Vancouver residents who rent a laneway house or basement suite know they are required to report net income from rentals. However, few understand the GST implications of building these dwellings, or the income tax implications when the property is sold.
      The Real Estate Board of Greater Vancouver and CRA have prepared documents setting out these tax obligations. Many accounting firms, including Grant Thornton, have also prepared useful tax advice.
     GST considerations related to laneway houses vary considerably depending on whether the house was built for long-term or short-term rentals, or a family member.
     Without going into all the details, if a property owner builds a laneway house to be rented to others, and is not registered for GST, he or she must self-assess GST on the fair market value of the laneway house and the land associated with it. Yes, that’s right. It is not just based on the cost of the laneway house. The valuation must include the associated land.
     Determination of land value could be difficult, especially since the laneway house cannot currently be sold. But if the CRA deems it to be say a quarter of the total lot value, even though the owner may be entitled to Input Tax Credits and certain tax rebates, the tax consequences could be significant.
     These rules apply because the homeowner is considered the builder of the laneway house for GST purposes. This is not the case if he or she purchases a property that already includes a laneway house.
      However, if the laneway house is built for a family member, the tax consequences are quite different; the owner may not be required to self-assess GST.
      But here is where it gets interesting. If that owner subsequently decides to rent the property, he or she will not have to self-assess the value of the laneway house and associated land because the status of the property will have changed to a “used residential complex.”
     Consequently, first occupancy of a laneway house by a related person provides the best outcome for the owner in terms of GST liability.
From my discussions with homeowners who have built laneway houses and contractors, few appreciate these GST tax implications. More importantly, they are not aware of what will happen when the property is sold.
     The principal residence rules are very complex, and most property owners should consult their accountants. But the key point is the laneway house is not eligible for the same principal residence tax exemptions as the balance of the property. Any deemed increases in value will be treated as taxable capital gains.
     Somewhat surprisingly, similar tax consequences could apply to basement suites that have been ‘structurally altered’ to meet city building codes. But this is another story for another day.

Wednesday, June 28, 2017

City Council approves so-called Empty Home Tax without regard to owners of second homes

Today I am ashamed to be a Vancouverite. The Vision members of Council approved the Empty Home Tax bylaw with only a few housekeeping modifications, and continue to consider a second home that is occupied 179 days a year to be deemed 'empty' as far as the tax is concerned. It's nuts.

When I asked the staff person from Planning Department responsible for the report if he was aware of any example of a successful application of a vacant home program in London or elsewhere, he couldn't give me one.

When I asked why the recommended taxing second homes, he replied their consultant said anything less than a 180 day threshold was not workable, noting programs that require you to log days isn't workable. While that is not what I asked, I have now requested a copy of this consultant's report. 

At any rate, the matter has been decided and life goes on. But below, for the record, are my speaking notes . A year or two from now, I will be interested to see just how much this program ultimately costs to administer, (the estimate has tripled from an initial $2.5 M to over $7.4) and how much revenue it brings in, and how many units truly come onto the rental market. I hope I'm pleasantly surprised, but somehow I don't think I will be. But the tax has achieved its objective of pandering to those voters who feel the city must do more to address housing affordability, especially those who invaded the council chamber yesterday screaming TAX THE RICH, HOUSE THE POOR!

Empty Home Tax
·       My name is Michael Geller & I’m here speaking on my own behalf, as someone with a longstanding interest in housing policy. I’m not here as a paid consultant or as someone affected by the tax

·       I agree we are in a housing crisis and need to take action to increase supply of affordable rental housing

·       Like you and everyone in this chamber, I am disturbed by the number of empty or vacant dwellings in the city and would like to see them put to use, rather than serve as safety deposit boxes for investors

·       So why am I here today? The city has repeatedly stated the goal of this tax is to bring empty and vacant units onto the rental market.

  I am not here to talk about empty or vacant dwellings. I am here to point out that there are many occupied HOMES which under this bylaw are ‘deemed empty’ that have become collateral damage under this tax. It is unfair to start taxing them under this bylaw when they are not empty.

·       These are the second homes of BC residents, Canadians living in other parts of the country, (some of whom once lived here or have family here) and yes, Americans and Chinese and Germans and so on). They are owned by BC politicians who regularly come into Vancouver; former residents who regularly return to see family, or for medical attention.

·       Again, These properties are not empty. Some are occupied throughout year on weekends or weeks at a time; others are occupied for 4 or 5 months over the summer.

·       My point is that these homes are no more likely to be rented out for 30 days at a time than the spare bedrooms in your home are likely to be rented out.

·       As you know I have been complaining about this aspect of the tax in the media & social media. Many have criticized me for advocating for people who own two homes when so many in the city can’t even afford to rent one, adding anyone who owns a second home can afford to pay the tax.

·       However, others have noted that by going after second home owners, this appears to be little more like an envy or jealousy tax. They see it as vote pandering to those who want to tax the rich to house the poor. (I gather than some of them were here to disrupt yesterdays council meeting).

·       Let me repeat. These second homes cannot be rented out when the owners aren’t here. Your bylaw might force the owners to sell their condos, but surely that’s not your objective. (I will add for the benefit of Tom Davidoff and others that when they are sold, the owners will pay Capital Gains Tax on any appreciation.

·       I strongly believe this tax will have a better chance of success, be more cost effective to administer, and be deemed more equitable if you amend the wording of the bylaw so that it clearly distinguishes between truly empty units, and those occupied for many months each year, but less than 180 days.

·       Your staff are clever enough to draft the revisions.

  When I questioned  the staff person administering the bylaw why this tax was applying to people owning second homes, I was told second home owners had choices. When I asked what choices, I was told they could pay the tax or sell their unit.

·       I sincerely hope members of Council do not think these are reasonable choices to offer someone who has chosen Vancouver as a place to live, including the Singaporean who according to the Vancouver Sun recently offered to build an art museum for the city because he loved our city so much after keeping a home here.

·       Finally, to truly increase the supply of rental housing, I urge you to address the problem of investor-owned Airbnb’s. These are having a far greater negative impact on available rental housing stock.

·       I also urge you to approve the backlog of rental housing projects in the system. When I last checked there are hundreds of rezoning and development permit applications awaiting approval, many of which include rental housing

·       Improve the city’s zoning to reduce number of rezonings.

·       I also recommend that the city set up a matchmaking service so that those who have empty suites, and there are hundreds of them, and even empty bedrooms, can make them available to those seeking affordable homes.

Thank you for your attention.