Beware the perils of buying or selling a pre-construction condo‏

Buying a pre-construction condo and then flipping it a few years later when it is finished, has been easy money. Things may have changed.

In Toronto’s hot real estate market, it has almost been a given that if you buy a pre-construction condo, you’ll be able to sell it at a profit when the building is finished a few years in the future.

But a few examples that have crossed my desk in the last few months show things may well have changed.

In one example, a condo was purchased by Syrian immigrants five years ago, before the outbreak of civil war. When the building was finished in 2013, the buyers couldn’t get their money out of Syria and so couldn’t close the purchase. Nor could they find anyone to buy their contract, so they lost all their deposits, which were more than $30,000.

In another situation, the buyer was approved for financing four years ago when the condominium agreement was signed with the developer. However, when the building was finished, the same lender refused to give the financing, stating that the buyer’s financial status had changed and that he no longer qualified for the mortgage.

In this case, the buyer was able to sell the contract before closing, but took a $20,000 loss. He also had to pay real estate commission on the sale, which further increased his loss.

In a third case, the buyers were able to sell before closing at a profit of $30,000. But they later received a reassessment notice from the Canada Revenue Agency. The CRA argued that since this buyer didn’t receive title to the unit, he had to pay tax on the full $30,000 gain as though it were income, and not as a capital gain, where they would have been taxed on one half the gain, or $15,000.

Is there any way you can protect yourself?

When you sign a pre-construction contract, always make sure you have the right to sell or assign it before closing.

The situation with the Syrian buyers was unfortunate, but it does not give them the right to cancel a contract. The same is true of the buyer whose financing was pulled at the last minute. In order to have this right, it has to be negotiated at the time the contract is signed.

Buyers should consider negotiating a clause with the builder that states that if there is a change of life circumstance before closing, such as death, serious injury or loss of employment, they can cancel the contract upon the payment of a set amount or penalty.

For buyers who have no choice but to sell before closing, there may be a way to fight a reassessment by the Canada Revenue Agency if you can demonstrate that at the time you bought, you intended to close the sale, but that circumstances changed at closing, requiring you to sell. Since every individual situation is different, it is best to always seek tax advice from a lawyer or accountant before making any decision to challenge a re-assessment.

In addition, if you are ever called by someone from the Canada Revenue Agency inquiring about any prior transaction you may have made, my advice is to tell them you will call them back, and then get legal or accounting advice first. In my experience, it is very unsettling to get a call out of the blue from the Canada Revenue Agency and it is easy to say something wrong or get confused.

Understand your rights before you buy any pre-construction condo, to avoid problems later.