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Comment by jedberg | Hacker News Reader

One big difference between Canada and the US is tax policy related to housing. In Canada, you don't pay capital gains on the sale of your home. In the USA you do if the gain was over $250k ($500k if you're married). So this creates a huge incentive in Canada to buy a house, renovate it while you live there, and then sell it and apply the entire gain to your next purchase.

It means Canadians who are already in the system can afford a lot more house in their subsequent purchases, especially at the high end.

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Capital gains taxes on your primary residence stops older people (who have large unrealized gains in the home they own) from selling their large, built-to-accommodate-a-family house to buy something smaller in a more convenient location. They’re not able to buy something in the same price bracket after selling, because of capital gains taxes. So old people stay in their large homes and younger people, who would actually need that larger house, can’t get into the market.

I would think dropping capital gains taxes on your primary residence, and have a property tax that scales with the market value of your home, would make the housing market more efficient.

It makes it more efficient by allowing the price to go more towards the natural price, which is high due to lack of inventory.

It keeps prices suppressed in the USA for exactly the reason you say -- old people won't sell their high end homes, which keeps the median price lower.

The lack of inventory isn't particularly natural.

Aren't you exempted from capital gains tax if you reinvest the money within a year or whatever?

Only the first $250k (or $500k if you're married). And you use it to buy another primary residence.

I think they are referring to a 1031 exchange.

https://www.investopedia.com/financial-edge/0110/10-things-t...

No, they were referring to the capital gains exemption, which is only allowed every two years.

Actually, you pay full cap gains on a 1031 exchange because it can't be your primary residence. You pay gains on the difference in value during the exchange, and if you sell it down the line you pay gains on the full difference (minus your improvements).

Just wave the tax if you're over a certain age or collect SS. Seems like a good compromise.

But then many provinces go and pursue policies like allowing seniors to defer property taxes until death, which if anything incentivizes them to stay in place.

I thought house-flipping like this was reasonably popular in the US. Is it common for renovations to homes to increase the value by more than $250k (or $500k for married couples)? My guess would be no and even if some couple buys an actual fixer-upper that needs a lot of work, they aren’t going to next look for some kind of dilapidated mansion in need of hundreds of thousands of dollars of repairs. I’m pretty unconvinced that this specific tax difference has a big effect.

Any improvements increase the cost basis in the US and reduces the capital gain as well.

I think the 2 bigger taxes difference are: 1. Property tax in Canada is often 80% less than much of the US. (0.28% in Vancouver vs 1.3% in Bay Area, CA vs 2.2% in Austin, TX) 2. Interest on $750k is tax deducible in the US, however with low interest rates, many people just take the standard deduction anyway.

Property tax as a share of property value is lower, but property tax revenue as a share of total taxation is similar.

this is 100% it. there's a ratcheting effect in owning housing in canada. that recent study about how 70% of homes in canada are being bought be investors is completely bogus. 70% of homes in canada are being bought by people who already own homes. often this is "investment" properties like rental units but a significant proportion of it is second ("vacation") properties and parents using their own equity to fund children's home purchases

I feel like your comment is implying that it's common for renovations in the US to increase the value of the property by over $500,000 (or over $250,000 for the sort of home that an unmarried person would flip). If that's not what you're implying, then there's no difference in incentive to reno-and-flip.

It seems to me that the incentive-difference is that in the US, the tax code is telling you to flip often, or not flip at all.

Another big difference in tax policy, if I recall correctly, is that Americans don't pay tax on mortgage interest. Seems to me, that incentivizes Americans to over-leverage on paying mortgage interest. Don't worry though, in Canada these days, we too over-leverage on mortgages, because otherwise we're homeless, as per the article. I sure wish I could tax-deduct my mortgage interest, because that's the main thing I spend money on.

Not a tax expert, but I don’t think you can flip often using owner occupancy. You are limited to a single deduction every two years: https://www.investopedia.com/ask/answers/06/capitalgainhomes...

1031 is probably closer to flip model, but not sure the implications of the rules.

I'd think that a $250k deduction (per person) every two years is pretty often, no?

I feel like if my entire income stream was buying, renovating to improve value, and selling, and my spouse and I had a family income of $300k per year, and we could only get the income tax waived on $250k of that (me one year, my spouse the next), and thus were only paying income tax on one sixth of our income, I'd feel like I wasn't paying very much income tax.

Though. I mean. Currently I teach post-secondary for a living, so the idea of a $300k two-earner family income sounds like a dream, no matter what the taxes, so maybe my intuitions about the incentives of house-flippers are off the mark.

It seems you are assuming that flipping houses is somehow super easy and therefore seemingly high returns and possibly preferential tax treatment are morally objectionable. Moral questions are very person and I won’t speculate on that. However, flipping is far from easy on a consistent basis - it requires: a lot of capital (that one has presumably earned), sourcing deals, managing transactions, carrying market risk while capital is not liquid, project management (at minimum, but I’m sure there are folks who actually do the repairs/renovations themselves), marketing/selling the property for profit. During all this time our hypothetical house flipper is not getting paid, they have to wait for this once every two years payout. That’s not how businesses run, so this tax treatment doesn’t really encourage house flipping. This tax treatment does help people that have to move for job or other reasons, which I’d say is a good thing.

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