The metaverse isn’t just another Bitcoin. It’s not even a recent concept! The metaverse simply describes integrated 3D virtual worlds — imagine games like Roblox or World of Warcraft. These games have been around for decades!

But as technology advances, companies are finding new ways to put the metaverse to use. McKinsey believes that the metaverse could drive physical product sales, reduce the need for physical stores, and enhance in-store experiences. The consulting firm further found that 64% of consumers surveyed were excited about shopping in the metaverse.

This article discusses the metaverse and how it may affect the real estate industry.

What is the metaverse?

The metaverse is any online 3D world where you can interact with others via an avatar. We’re used to metaverses through video games. But companies now want to apply the technology to industries beyond gaming.

For example, instead of using a video conference to meet with someone halfway across the world, you could meet in a metaverse and engage in new ways. Integrate this experience with virtual and/or augmented reality and create a much more immersive experience than just a ZOOM call.

You could also create better digital shopping experiences. Instead of flipping from webpage to webpage, consumers may someday visit virtual malls from the comfort of their homes. Here, people could purchase real-world items in a more mesmerizing shopping experience, and this better user experience could translate to more sales.

The possibilities for the metaverse are endless. And the industry is only beginning. That’s why everyone has high hopes.

Many people are already investing in the metaverse by purchasing land in specific digital universes, hoping that the value of these digital properties will appreciate.

How does buying metaverse land work?

Some metaverses let you purchase unique digital land and other properties. Big names like Snoop Dogg and Steve Aoki already own properties in a metaverse called Sandbox. Decentraland is another popular network where people can purchase unique parcels of land.

Metaverses usually have their own cryptocurrency used as a medium of exchange. Decentraland’s currency is called MANA, for example. To purchase real estate on Decentraland, you ultimately need MANA.

After obtaining the necessary currency, the land purchase process depends on the specific metaverse. Each has its own procedures.

Many assign you an ownership ID to the digital land parcel, similar to an actual deed. Buyers may need to show proof of their real-life ID and address too. Your virtual deed could also come as an NFT.

Like the real world, these properties can be anything from houses to apartments to commercial storefronts. It can also be a plot that you develop into a customized residential or commercial space.

Unlike reality, land in metaverses is infinite. There’s also usually no travel time between two points in a metaverse. In the real world, land scarcity and a property’s location determine a building or land parcel’s value and cause it to appreciate.

A particular area of a metaverse might appreciate for other reasons, however. If you own the digital parcel beside Snoop Dogg, you could expect that that land could fetch a nice premium. High-traffic areas are generally the ones that sell for big dollars.

For example, one parcel of Decentraland land sold for $2.4 million worth of MANA in late 2021. This piece of land was located in the “Fashion Street” area of Decetraland, making it highly valuable. The purchaser, tokens.com, hopes to one day build a virtual shopping centre to sell virtual clothing for digital avatars.

In addition to infinite land, there’s also the potential for infinite metaverses. If Google, Meta, and other large tech companies all started a consumer-targeted metaverse, this could reduce the popularity of Decentraland or Sandbox and then reduce the value of all land there as investors rush to invest in a new metaverse.

Just think of the rise and fall of other websites and networks! You don’t know if your metaverse will be the next MySpace or Tumblr.

How Could the Metaverse Affect Tangible Real Estate?

While the potential for a new way to “invest” in real estate might become viable someday, how can the metaverse affect the real estate we know? One way is through more immersive showings and the ability to meet online in the metaverse.

Realtors currently use many ways to display a property. Photos are the most common. But videos, 3D renderings, and 360-degree cameras are increasing in popularity too.

But imagine a metaverse where potential buyers can walk through online replicas of houses on the market. Suddenly, buyers in foreign locations can view a listing as if they’re there. This could help increase the draw and attraction of a house and encourage more buyers.

Simultaneously, a realtor can take buyers through the property and interact with them in the metaverse as if it was a real-world showing.

The metaverse could also change home buying by giving buyers, sellers, and brokers a place to meet. As a buyer or seller, you may someday have an initial consultation with a realtor in the metaverse when an in-person meeting isn’t viable. Or, suppose you meet your mortgage broker in the metaverse. The ability to show and view facial expressions and body language could help you explain your needs and allow realtors or brokers to reveal how they can help.

The metaverse is not a new technology. But many companies are now trying to apply it to new industries. Buying and selling real estate in the metaverse has significant actual dollar values, though it comes with numerous risks.

For real-world homebuyers and sellers, the metaverse has numerous applications in how we’ll someday view a home or meet with the people who help us in the home purchase or sale process.

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Capital gains tax is generally taxed at half the rate of income tax but can be entirely exempt through the principal residence exemption. That means, if your property is considered a principal residence, it may be entirely exempt from capital gains tax!

In this post, we’ll explain exactly what makes a property a principal residence and what the limitations are on this powerful tax exemption.

What is a principal residence?

Though this may seem like a bunch of vague terms, we can further break down some points.

A housing unit refers to a house, cottage, condominium, apartment, trailer, mobile home, or houseboat. Any of these types of properties can qualify as a principal residence and thus be exempt from capital gains tax. The ability to claim properties other than your regular home is helpful in cases where a cottage is growing in value faster than your home, meaning you can use the principal residence exemption on your cottage instead.

Designating a principal residence

You designate a property as your principal residence when you sell it, and you can mark it as your principal residence for any amount of time up to the number of years you’ve owned it. There is also the ability to pick and choose which years you want to designate the properties you own as your principal residence. For example, your main home can be your principal residence between 2007-2012 then your cottage can be your principal residence between 2013-2019. Just remember that you’ll need to pay capital gains tax for every year a property wasn’t designated as a principal residence.

In the past, you could sell your principal residence and not even report it to the Canadian Revenue Agency (CRA). However, changes in 2006 meant to close tax loopholes changed this, and basic information of the sale of a principal property has to be reported on your income tax returns for you to claim the full exemption. If you don’t report the sale, you may be liable for capital gains tax on the sale, late charges, and interest.

Although it would be amazing to have more than one principal residence, each taxpayer can, unfortunately, only have one. For years after 1981, it’s taken a step further and broadened from a taxpayer to the whole family unit. This means that if you designate the family home as a principal residence, your spouse can’t go and designate the cottage as his/her principal residence.

Ordinary residence

So, what if someone designates a property as their principal residence but doesn’t actually live there… What if they own the property as an investment and spend their life living in Florida? Well, that’s where the ordinary residence rule comes in.

For a property to be a principal residence, the owner, the owner’s spouse or common-law partner, or the owner’s children have to occupy the property “ordinarily”. What “ordinarily” means is quite ambiguous once it gets to the courts. With this being said, however, a seasonal residence such as a cottage or houseboat does come within this definition of “ordinarily reside”.

½ Hectare rule

With these rules on principal residence, it might seem like a great idea to buy one big chunk of land and designate it as your principal residence. Unfortunately, the exemption also limits you to how large a principal residence is—i.e., ½ a hectare or 1.24 acre. But, if you can show that you need more land to enjoy your home—for example, your city has a minimum acreage residential zoning requirement or if you need more land to reach city roads—then your principal residence can go beyond the ½ hectare.

Earning income with a principal residence

If you change your principal residence to a rental or business property, you can continue to assign it as your principal residence. The only catch is that you must report the net income derived from the property and that you can’t claim any capital cost allowance (i.e., tax deductions for depreciation) on that property. This can continue for four years and be extended if all the following are met:

You can also continue to use your home as your principal residence if you’re renting part of it out while living at the property. If this is a duplex or triplex, where you live in one unit and rent out the rest, then you would claim your unit as your principal residence and the others would be subject to capital gains tax.

If there are no clear divides in which portion of the home is a rental and which part is where you and your family reside, the CRA generally finds that the property can retain its principal residence exemption as long as there were no structural changes to accommodate the rental and there were no capital cost allowances claimed. These rules extend to renting out your property as an Airbnb

The principal property exemption is a powerful tax rule in Canada. It can allow you to be completely exempt from capital gains taxes when selling your home. Due to its power, there are many conditions you need to meet to make a property a principal residence, and there are also various ways to work with the exemption to maximize tax deductions. It’s best to check with your accountant and realtor to see how to really get the best of this exemption.

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Bidding wars are becoming a more common practice in Canada’s real estate market — especially in hot markets such as Vancouver, B.C., and Toronto, Ont., where prices are high and vacancies are limited.

The Canadian Press via the Globe and Mail reported that bidding wars are part of the reason as to why the prices in these two Canadian hot spots are so high.

“Bidding wars are responsible for pushing prices up, often above what a home is worth, experts say. They have turned buying a home in Canada into a game of nerves,” reporter Sean Kilpatrick wrote in 2016.

But what exactly is a bidding war?

A bidding war is when a seller presents their home on the market with a reduced price tag stimulating interest and encouraging multiple offers.

When dropping that price, ask your Real Estate agent to pull a comparative market analysis to be sure you’re not devaluing your home as that can backfire. Instead, be sure that your price represents the best value for the neighbourhood, condition, location and price.

Once the bidding war begins, be cautious. Take it slow. Sometimes the highest offer presented by a prospective buyer isn’t the best offer available.

Sellers are typically looking to make as much of a profit as possible on the sale of their home, but getting excited too quickly over a juicy offer may make the seller jump too soon. This may mean potentially missing out on higher offers.

Nathan Dautovich, the franchise owner of Downtown Toronto propertyguys.com, told Huffpost sellers should avoid selling their home in a bidding war.

He said many who opt into a bidding war often skip over a thorough analysis of other options.

“When I help people to sell their homes privately, we always look at all relevant sales and get a market evaluation through the help of an appraiser,” he said. “We look at homes that sold through bidding wars, and also homes that sold using a more traditional method.”

“In almost all cases, we’ve found that on average, houses that sell using the traditional method have a higher success rate, and they also sell for a higher price,” Dautovich added.

Here’s why Dautovich thinks that is: having a limited timeline for showings in bidding wars means that potential buyers are also being limited.

What if, for instance, the perfect buyer was out of town that week? Now, they’ve missed out on that property entirely.

Or, what if the potential buyer is turned off by bidding wars all together and choose to skip putting in their bid — even though the home is perfect and they could have potentially paid the asking price.

Dautovich also warns that bidding wars can create opportunities for a bid that is too high and once the appraisal returns it may not match the purchase price presented and therefore the funding won’t be approved by the lender. This doesn’t help the seller at all. Now, they’ll have to accept a lower offer because it the bidding war went too high.

He does suggest that a bidding war is a valuable option for sellers who are looking for a quick sale. But, again, this comes with a price.

For bidders and potential buyers, there are some things to keep in mind. Your budget, for one. Don’t bid out of your price range. Set a “cap bid.” Your first offer can be higher than the asking price, but be sure you stick to your guns and don’t bid yourself into a place you can’t come back from.

Similar to gambling, bidding can be ego-driven. Keep your goals in mind, do your research and be sure you’re bidding for the right reasons. Do you absolutely love this home? Can you picture raising your kids here? Can you see yourself hosting friends and family for Thanksgiving dinner in that dining room? Keep these in mind and stop bidding if the prices jump too high.

A lot of Realtors will recommend to their clients to make their bids personal. They often suggest writing a “love letter” to the home. Talk about how swoon-worthy the neighbourhood is and what you love about the home specifically.

If your lucky, the letter may warm the heart of the seller enough to pick your offer over a higher bidder who may just have plans to demolish and build an infill.

Sometimes it’s not all about the dollar signs and zeros. Sometimes the seller is genuinely seeking someone who will love their home just as much as they have for all of these years.

To summarize, there are definitely benefits to entering into a modern-day bidding war. There is the potential that you can get a lot more than your asking price. However, there are some serious risks involved.

Bidding wars, like gambling, can go either way — although, yes, the odds are more in favour of the house!

(But, we’ve all seen movies where the house loses big time. No one wants to be that house.)

I digress. There are risks involved…

Like Nathan Dautovich said, due to the restrictions set around a bidding war, the seller could potentially be missing out on the optimal buyer. Whether they’re out of town and miss the deadline, or are deterred by the stresses of playing the odds, you — as the seller — don’t want to miss out on the perfect buyer.

So, enter at your own risk. DO Hire a professional to help you along this journey and advise you on best practices. And, at the end of the day, keep those fingers crossed.

The post Bidding Wars Aren’t Always the Best Route for Home Sellers first appeared on RankMyAgent - Trusted resource about Buying, Selling and Renting.