Buying or selling a home doesn’t come cheap. There are taxes, lawyer and mortgage fees, and not to mention your realtor’s commission. And some fees consistently catch buyers and sellers off guard.
Richard Silver, Senior Vice President - Sales at Sotheby’s International Realty Canada, finds that land transfer taxes and the Foreign Buyer’s Tax are usually the ones people don’t see coming:
[The closing costs that catches sellers and buyers off guard is usually] the 2% land transfer tax for the Province and [the other 2%] for the City of Toronto. If they are foreign without their permanent residency, they would also be subjected to a 15% Foreign Buyer's Sales Tax.
A buyer and seller both have their own closing costs to worry about, but this article explains the fees to expect when you sell your home.
While it’s a relatively minor fee compared to the commision, a real estate lawyer can still cost upwards of $1,000 depending on the complexity of the deal. However, the service is well worth it as a lawyer protects you throughout the transaction, makes sure that all the terms in the offer are fulfilled, and that requirements by the buyer and other third parties are met. Silver confirms the service is worth it:
The lawyer makes sure that the buyer has a clear title on closing. Sometimes this is alleviated by title Insurance but [title insurance] cannot replace good due diligence.
In addition to paying for these services, a lawyer charges you for disbursements, which are fees your lawyer had to pay to other companies on your behalf in the process of selling your home. This can include courier services, postages, photocopies, etc... Your lawyer pays these fees on your behalf due to convenience reasons.
Title insurance is another part of the legal fee. It’s often part of the disbursements, although it’s a little more complex than photocopies and postages. Title is the legal proof that you provide to the buyer and to third parties to show that you currently own the property being sold. The title shows any registered mortgages, liens, and other important details.
Title insurance, on the other hand, protects you from any errors or misrepresentations on the title that could impact you negatively. The coverage usually costs a few hundred dollars but can save you thousands and protect you from fraud, survey errors, encroachment issues, and much more. And this is usually purchased by your lawyer.
If you discover that your last renovation encroached onto your neighbour’s property because of a survey error, title insurance would pay to rectify this issue.
Lastly, a lawyer prepares a statement of adjustments to show any fees that you paid in advance that the buyer would have to pay you back for upon closing. These prepaid fees can include tax or utilities, and the final adjustment statement includes these into the closing price.
If you paid for the full year’s land tax in January and the sale of your home closes at the end of March, the buyer has to compensate you for the April-December portions of the land tax—or ¾ of what you paid.
Land transfer tax is a common term you may hear in real estate transactions, but it’s not something to concern yourself with if you’re doing the selling. Land transfer tax is usually never paid by the seller and is usually paid by the buyer.
If you’re selling an investment property, however, you need to consider capital gains tax. If the property isn’t your primary property, it’s considered an income or investment property. When you sell, you’re taxed on the appreciation (how much you bought it for - how much you sold it for). 50% of the appreciation value is taxed as income, and this can also push you into a higher tax bracket for the year.
For example, if you make $100,000 annually and sell your investment property with a capital gain of $50,000 (maybe you bought a condo for $700,000 and sold it for $750,000), then your annual taxable income for that year is now $125,000 ($100,000 + (50% of $50,000)) Suddenly, your income tax for the year goes from $27,860 to $33,286.
If you have a mortgage, selling your home may result in a mortgage prepayment/breakup penalty or a porting charge. This depends on the contract you signed with your lender when you first got the mortgage.
Mortgage prepayment/breakup penalties occur when you pay off your mortgage in advance of the payment schedule and leave the mortgage contract. When selling your home, this is typically done because a new mortgage at current interest rates can save you more money than the cost of the penalty. Every bank is different, but Canada’s Big Five typically charge a prepayment fee of three month’s interests or the interest rate differential—the difference between current interest rates and the interest rate on your mortgage—whichever one is greater.
Calculating the exact penalty can be complicated, but to give you a taste, if you have $400,000 remaining on your mortgage, the penalty can be over $8,000! If you don’t want to pay the penalty or want to keep your current mortgage rates then porting your mortgage is the better solution.
Porting is moving your mortgage contract from the property that you’re selling to your newly purchased property. The fee associated with porting is usually a lot less than a prepayment/breakup penalty.
Porting may not always be possible, however. Some mortgage contracts don’t have this option, or if you’re upsizing, your mortgage broker may need to confirm that you have the income and debt-equity ratio to maintain a bigger mortgage. It’s best to understand the terms and conditions when you first get your mortgage, so you’re not stuck with more unnecessary fees when you sell.
Surveying is not done as often as it should be, but is highly important to the real estate transaction. A survey is done by a professional who examines the deed and maps of a property to identify what the seller actually owns. By completing a survey before the sale, the parties can buy/sell with the confidence of what is being bought/sold.
Although issues due to land surveys are usually covered by title insurance, title insurance cannot replace a land survey. This $750-$1,000 expense can save you the stress of your deal falling through after the buyer realizes that there are issues with land ownership.
So how do you know if you should get a new survey? Silver advises,
A new survey is always warranted if the building has been added to and/or if fences were moved or removed since the last survey.