Tips To Buying on Leased Lands

A home is a substantial and important purchase. It is one of the few tax-free investments available to Canadians. There are no income taxes due on the capital gains, when selling a primary residence.* As well, retired homeowners often want to tap into the equity of a mortgage-free home with a reverse mortgage or sell the property to fund assisted living. Home is where the heart is and where people build wealth.

Although there are exceptions, the quality of that investment is very much affected by the land beneath the foundation. Structures deteriorate (and depreciate) while land appreciates. Land is finite, even more so in a world where the population is growing exponentially.

Buyers may fall in love with a spectacular kitchen, or vaulted ceilings, but they should also consider the land. There are three main types of ownership inCanada: strata, freehold and leasehold. Generally, a house on freehold land will appreciate the most because the land ownership is 100 percent. In a strata property, such as a condominium, each owner has ownership of a small percentage of the land, which helps to increase property value. Living on leased land offers no land title but occasionally offers some surprises!

In 1995, people living on leased lands titled to the Musqueam Indian Band suddenly faced rents of up to $36,000 a year. This was a huge increase from the $300 to $400 a year the leaseholders had been paying for 30 years. They spent five years and $1.5 million to fight the increases in court. The Supreme Court ruled that land rents could go as high as $10,000 per year.

In 2015, when the lease terms were up for renewal, the Musqueam Indian Band announced another increase, this time of eight times the previous rate. A resident would pay up to $80,000 per year instead of $10,000. Many of these homes are on relatively large lots, some with swimming pools, in a lovely neighbourhood. These people have invested in a structure, which cannot easily be relocated, plus the opportunity to live at a certain address.

Some of the people living on Musqueam Indian Band lands are fortunate to have prepaid leases. They were able to avoid the dramatic increases.

For buyers looking to purchase a home on leased land, lenders now typically require a prepaid lease. Banks also want the lease to exceed the length of the mortgage (amortization period) by several years. This is because landowners can evict tenants at the end of the lease period. Although it is unlikely that a landowner would do this, it is their right. They could decide to build a commercial complex, if they feel that is more profitable than residential housing.

A reverse mortgage is also less attainable for homeowners living on leased land. A reverse mortgage relies on land value for a stable price. Home shoppers should research whether a potential purchase would qualify for a reverse mortgage in the future. Being able to unlock the equity in a home can add to comfort in retirement.

What are the benefits of purchasing on leased land? Price is a key benefit. Typically it is less expensive than a home on freehold land. If a person wants to own a house, for example, but cannot afford one in an area with freehold title, a home on leased land could be an option.

Location is another benefit. Sometimes leased land is in a great location beside a lake or a ski hill.

InCanada, under the Indian Act and protected under the Constitution, title to certain reserve lands is held by the federal government ofCanadafor the use and benefit of a band. Some bands are self-governing and are granted full control over management of the lands and have a separate land registry system.

For those considering buying a home or condominium on leased land, research is essential. Consider these points:

  • What are the lease terms?
  • What are the fees, taxes and/or rents payable on the property?
  • Does the property qualify for a reverse mortgage, if desired?
  • What is the price history of the property?

Buying on leased land can be a good option for buyers who purchase with a full understanding of the costs and the lease structure weighed against the benefits.

* When you sell your home, you may realize a capital gain. If the property was your principal residence for every year you owned it, you do not have to report the sale on your income tax and benefit return. For more information, visit http://www.cra-arc.gc.ca.

Buying on Leased Lands

 

A home is a substantial and important purchase. It is one of the few tax-free investments available to Canadians. There are no income taxes due on the capital gains, when selling a primary residence.* As well, retired homeowners often want to tap into the equity of a mortgage-free home with a reverse mortgage or sell the property to fund assisted living. Home is where the heart is and where people build wealth.

 

Although there are exceptions, the quality of that investment is very much affected by the land beneath the foundation. Structures deteriorate (and depreciate) while land appreciates. Land is finite, even more so in a world where the population is growing exponentially.

 

Buyers may fall in love with a spectacular kitchen, or vaulted ceilings, but they should also consider the land. There are three main types of ownership inCanada: strata, freehold and leasehold. Generally, a house on freehold land will appreciate the most because the land ownership is 100 percent. In a strata property, such as a condominium, each owner has ownership of a small percentage of the land, which helps to increase property value. Living on leased land offers no land title but occasionally offers some surprises!

 

In 1995, people living on leased lands titled to the Musqueam Indian Band suddenly faced rents of up to $36,000 a year. This was a huge increase from the $300 to $400 a year the leaseholders had been paying for 30 years. They spent five years and $1.5 million to fight the increases in court. The Supreme Court ruled that land rents could go as high as $10,000 per year.

 

In 2015, when the lease terms were up for renewal, the Musqueam Indian Band announced another increase, this time of eight times the previous rate. A resident would pay up to $80,000 per year instead of $10,000. Many of these homes are on relatively large lots, some with swimming pools, in a lovely neighbourhood. These people have invested in a structure, which cannot easily be relocated, plus the opportunity to live at a certain address.

 

Some of the people living on Musqueam Indian Band lands are fortunate to have prepaid leases. They were able to avoid the dramatic increases.

 

For buyers looking to purchase a home on leased land, lenders now typically require a prepaid lease. Banks also want the lease to exceed the length of the mortgage (amortization period) by several years. This is because landowners can evict tenants at the end of the lease period. Although it is unlikely that a landowner would do this, it is their right. They could decide to build a commercial complex, if they feel that is more profitable than residential housing.

 

A reverse mortgage is also less attainable for homeowners living on leased land. A reverse mortgage relies on land value for a stable price. Home shoppers should research whether a potential purchase would qualify for a reverse mortgage in the future. Being able to unlock the equity in a home can add to comfort in retirement.

 

What are the benefits of purchasing on leased land? Price is a key benefit. Typically it is less expensive than a home on freehold land. If a person wants to own a house, for example, but cannot afford one in an area with freehold title, a home on leased land could be an option.

 

Location is another benefit. Sometimes leased land is in a great location beside a lake or a ski hill.

 

InCanada, under the Indian Act and protected under the Constitution, title to certain reserve lands is held by the federal government ofCanadafor the use and benefit of a band. Some bands are self-governing and are granted full control over management of the lands and have a separate land registry system.

 

For those considering buying a home or condominium on leased land, research is essential. Consider these points:

  • What are the lease terms?
  • What are the fees, taxes and/or rents payable on the property?
  • Does the property qualify for a reverse mortgage, if desired?
  • What is the price history of the property?

 

Buying on leased land can be a good option for buyers who purchase with a full understanding of the costs and the lease structure weighed against the benefits.