When looking for a house, many gravitate towards newer homes. Some want new because it will mean fewer repairs and less upkeep. Others want new because modern design appeals to them. Two choices for getting a new urban home are: self-builds, or spec houses— houses built by a developer or builder before the buyer is known or under contract.

Although it is hard to make an apples to apples comparison, there are sound financial reasons that support self-building over purchasing a spec house. With a comparable budget, self-building allows homeowners to build a better house by eliminating certain issues and costs associated with the spec house process. Here are four examples.

  1. Spec houses are typically lower quality builds
  2. Spec houses and the property they sit on are subject to HST
  3. Spec houses and the property they sit on are subject to income tax
  4. Spec houses lead to the payment of land transfer tax(es)

Spec Houses are Typically Lower Quality Builds

Spec houses can be risky ventures because they are built before the buyer is known.  To limit the extent of this risk the developer keeps the build costs as low as possible while ensuring the home’s decorative finishings appeal to the mass market. Often the final product is a house constructed with inexpensive materials with the exception of more visible finishes like granite countertops.

In contrast, when you rebuild your own home, you can ensure that the quality of the materials and workmanship of the home are of an appreciable standard. This is a worthwhile financial investment because it translates into greater comfort, lower utility bills, fewer repairs and lower upkeep costs.

Spec Houses and the Property they sit on are subject to HST

In Ontario, the HST (13%) is charged on new builds— the entire property at the time of sale, not just the materials and labour required for the build. This means that if you purchase a spec home (and the property it sits on) for $1.8 million, 13% of this sum— $234K— must be charged by the developer as HST. This includes an HST charge on the value of the land which, in Toronto, can be close to $1M. HST rebates are available in Ontario on the purchase of a newly constructed home but they do not exceed $30,000.

When you build your own home, you only pay HST on the materials and labour required for the teardown and rebuild. With the same budget more money can be spent on better quality materials and finishes.

Spec Houses and the Property they sit on are subject to Income Tax

Like all goods and services, the sale price of a spec home and its property will include a margin of profit for the developer. In Canada, the profit is subject to income tax if the property has been purchased with the intent of reselling at a profit or developed and sold as a business endeavour because it is considered a business transaction. The income tax, payable by the developer, is factored into the sale price of the property, adding to the overall cost of the house, but not its intrinsic value.

In contrast, the homeowner who self-builds will avoid this charge because they are developing their own property. Again, these savings can be redirected to materials and finishes. In addition, if the self-build is the homeowner’s principal residence, the principal residence exemption will eliminate all income tax on the property’s capital gain when they sell.

Spec Houses Lead to the Payment of Land Transfer Tax(es)

The purchase of a spec home, which comes with the purchase of a new property, will require the homeowner to pay land transfer tax(es), which are significant. In Toronto, if you are not a first time home buyer, the purchase of a $1.8M home will result in a total land transfer tax payment of $64.2K. If you are rebuilding on your own lot, this expense falls away because you are not purchasing a new lot.

Get The Best of Both Worlds

In consideration of these numbers, self-builds often make more financial sense. The issue is managing the process. This is where we come in. KAAV LIVING has been created to make rebuilding much more accessible for homeowners by facilitating the builds of KAAV homes— beautiful, simple, functional, limited edition, high quality homes. Through this process homeowners can self-build without becoming burdened or overwhelmed by the process. KAAV LIVING will facilitate the build of KAAV homes. It can also act as a consultant on the rebuild of custom homes.

If you would like to learn more about the financial advantages that come with rebuilding your own home, I’d be happy to speak with you.

Disclaimer: The above information is intended to be a general overview. It does not constitute tax advice. It is always advisable to consult a tax adviser to determine your tax situation.