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Canadians Buying U.S. Properties

Are you eying a condo in a warm, southerly location – like Arizona or Florida – where the temperatures are balmy year-round? Buying a property in the U.S. has never been more attractive for Canadians, driven by favourable exchange rates and post-sub-prime crisis low prices. But for Canadians purchasing in the U.S., it’s important to consider both the financing options and tax implications.

Financing Options

At first glance, buying a property in the U.S. seems like a no-brainer. You get the best of both worlds: record low mortgage rates and rock bottom housing prices. However, you’ll have to jump through a lot more hoops to purchase a U.S. property, in comparison to buying a home here in Canada.

To start, you can’t take out a mortgage from a Canadian lender in order to purchase a U.S. property, because Canadian lenders have no legal jurisdiction in the U.S. If you – the homeowner – failed to make your mortgage payments, a Canadian bank could not pursue repossession of the house.

For Canadians thinking of purchasing a home or investment property in the U.S., there are three options for financing to consider:

1. Access the equity you’ve built in a Canadian property

Much like the way you would take equity out of your home to complete renovations or to purchase an investment property in Canada, you can take equity out as cash and use it to purchase a property in the U.S. In fact, you can access up to 80 per cent of the value of your home in Canada, through a home equity line of credit (HELOC) or a refinance. HELOC rates are as low as 0.5 per cent above Prime, and a refinance could give you the option of switching to an even lower rate. The goal in doing either would be to take out enough cash that you could purchase your U.S. property in full, to avoid having to borrow from a U.S. lender. However, this route is only an option for those who have a substantial amount of equity in their homes and requires you to pledge your home in Canada as collateral.

2. Open a non-secured line of credit

If you haven’t built up the required amount of equity in your home, a line of credit from a Canadian lender is another borrowing option. Although you’ll pay a higher interest rate than you would with a HELOC, the rate would still be substantially lower than anything a U.S. bank could offer you on a mortgage. The one concern with this financing option is the fact that, while your primary residence would not be at risk, the interest rate on your line of credit would shift with Prime. Should there be a Bank of Canada interest rate hike, your interest rate (and payments) could spike.

3. Finance through a U.S. bank

If Options 1 or 2 don’t work, or only cover a portion of the price of the U.S. property you are going to buy, your final option is to take out a mortgage with a U.S. bank. Similar to when you buy a property in Canada, a U.S. bank will lend you money secured by your U.S. property. However, while American citizens have access to attractive products – such as a 30-year mortgage at less than 4 per cent – they are often not available for Canadians. The major reason for this is the fact that U.S. lenders don’t often count your Canadian credit history, when considering your application. Mortgages in the U.S. also work differently – instead of negotiating down from a lender’s posted rate like we do in Canada, the posted rate in the U.S. is the best rate available to borrowers. So, not only do Canadians have to jump through more hoops to finance a home in the U.S., they also have to do so at higher interest rates than what American citizens have to pay.

Luckily for Canadians, a number of our banks have U.S. subsidiaries. If you can negotiate with a U.S. subsidiary of your current bank, you will likely pay a lower rate than what a typical U.S. lender would offer you, since they would include your Canadian credit history in your application.

If you’re going this route, and taking on a mortgage from a U.S. lender, you need to be prepared to make a heftier down payment than you would in Canada. Here, we are able to buy homes with as little as a 5 per cent down payment. In the U.S., you will need to put down much more – often at least 20 per cent – so you need to have access to at least some cash before you can consider buying.

Tax Implications

Aside from having to consider your financing options, there are three major tax implications to consider when buying real estate in the U.S.:

1. Rental income

If you rent out your vacation property in the U.S., that rental income is subject to personal income tax and will require you to files taxes in both the U.S. and Canada. You’ll pay Uncle Sam first, then receive a credit for the amount of taxes paid and use that when filing with Canada Revenue Agency. It’s important that you never forget to file your taxes in the U.S. – if you do, you’ll be subject to a 30 per cent penalty of your gross rental income.

2. Capital gains tax

If you sell U.S. real estate for over $300,000, you are subject to a capital gains tax. In the U.S., 100 per cent of your capital gains are subject to your personal income tax. However, if you’ve owned the property for a least a year, you are only taxed at a rate of 15 per cent. If you pay U.S. capital gains, be sure to claim a credit on your Canadian income tax return. And keep in mind that, should you pass away, your estate will owe taxes to Canada Revenue Agency for your U.S. property’s capital gains.

3. Estate taxes

Two things are inevitable in life: taxes and death. If you pass away, and you have both a worldwide net worth of more than $5.12 million and U.S. property valued at more than $60,000, the manager of your estate will have to file a U.S. estate tax return. Unfortunately, in doing so, your estate manager will have to pay a hefty tax of 40 per cent on your U.S. property. But until the property is sold, this is just one more thing that the manager of your estate will have to handle each year.

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