Things to consider about owning U.S. property
(Special) – Winter brings with it the dream of many Canadian snowbirds of owning a piece of property in the sunny south. With the recent rebound in the U.S. housing market and a decline in the value of the Canadian dollar, however, buying vacation property south of the border may not be quite as appealing as it was a couple of years ago.
“If you are just looking for a property deal you are probably too late as the housing market has already rebounded and the Canadian dollar has dropped against the U.S. greenback,” says Cleo Hamel, a senior tax specialist with American Expat Taxes. “Before you begin you should ask yourself some important questions, because how you answer them could well determine whether this is the right decision for you.”
One of the first issues to consider is how you’re going to finance your purchase. As a foreign investor, if you don’t have the full down payment for the property you may have to qualify for a mortgage, which can be difficult.
The mortgage lender is likely going to look at your credit history and sometimes will ask for up to six months of mortgage payments up front. “You may need to make a larger down payment than expected because you have no credit history in the U.S.,” Hamel says.
Canadians cannot get a Canadian mortgage for a property in another country. However, if you already own property in Canada with enough equity, you could refinance it here and use the money to buy in Florida.
In the end, the best and maybe cheapest way to finance your purchase might be to borrow the money in Canada and buy the property in Florida outright.
When you live in the United States part-time and own property or other investments there you can be affected by the tax laws of both countries. In the United States you could be liable under certain circumstances for income tax, capital gains tax, estate tax and gift tax.
If you own a piece of real estate in the U.S., when you die U.S. estate taxation rules apply.
You also have to report your property every year according to Foreign Account Tax Compliance Act (FATCA) rules in the U.S. and on the T1135 form in Canada.
The FATCA was passed in the U.S. in 2010 to help detect U.S. persons who may be evading U.S. tax using financial accounts held outside of the United States. The T1135 Foreign Income Verification statement must be filed by Canadian resident individuals, corporations and certain trusts that at any time during the year own specified foreign property costing more than $100,000.
“If you fail to report to one of the governments they share the information and they will find out,” Hamel cautions.
There are different tax rules for Canada and the U.S. For example, you have to claim depreciation on a rental property in the U.S. whereas it is optional in Canada. “You therefore should prepare your returns at the same time to save the most tax,” Hamel advises.
Your U.S. tax implications will depend on how many days you spend in the United States per year.
The Internal Revenue Service has a complicated way of conducting the “substantial presence test” which determines whether you have been in the U.S. long enough to be considered a U.S. resident for tax purposes.
The formula works this way. Each day in the U.S. in the current calendar year counts as one day; each day in the U.S. in the prior year counts as one-third of a day; and each day in the U.S. in the year before that counts as one-sixth of a day. If the sum of those three numbers totals 183 or more, the IRS may insist you file a U.S. tax return.
There are other issues as well. Property taxes vary in Florida from county to county and you should check out your insurance policy for things like hurricane coverage and coverage when you are not there. Some policies will not provide coverage when you are absent, even if you have someone checking on the property, which is why many people buy condos over stand-alone houses.
Before buying it might be advisable to consult a cross-border tax adviser. “Canada and the U.S. may share the world’s largest border but there are significant differences,” Hamel says. “It’s important to look at more than the selling prices of a house – make sure you do your research so you know all the costs and tax implications involved.”
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.