July 4th Celebration in Fort Collins Colorado
by Melvin Schlubman

Canadians are  the largest non-American buyers of US real estate today. Low prices make US property very attractive, but Canadians should be aware of all the complications resulting from purchasing foreign property before buying. Tax and estate planning is always best done beforehand, and carefully, to avoid unpleasant surprises.

“These are the best buying prices I have ever seen for US houses,” said Bob Keats, a financial planner since 1981 and author of The Border Guide: A Canadian’s Guide to Living, Working and Investing in the United States. "Canadians are able to buy one-third more than they could have a few years ago.”

Low Prices, High Affordability

The National Association of Realtors (NAR) calculating the housing affordability index in the US shows that an average family now has 175 per cent of the income necessary to qualify for a conventional loan covering 80 percent of a median-priced existing single-family home. In 2008, it was only 137.4 per cent.

The US real estate market isn’t healthy. The prices are still falling and US residents are waiting for them to bottom out, so they prefer renting to owning. That’s the reason house prices haven’t had any bigger run-ups since the collapse in 2008.

The strong loonie has also made the US housing market attractive. Buying a house in the US seems to be a great deal.

US Laws And Canadian Laws

Housing affordability is now
much lower (160-190) than in 2008
when the index was only 137,8.

“There’s a presumption among people that the laws must be the same in the US and Canada. A lot find out otherwise only after they buy,” said David Altro, a Montreal-based specialist in cross-border tax, property, and estate-planning issues.

Although Canada and the US have a lot in common, their laws are different in several ways including estate laws. There are many variables that could change the great deal to unpleasant complications due to details specific to the location and cultural differences.

Rachelle Berube, a Toronto-based property manager, wrote in her blog: “A friend bought a house in Florida for $60,000, which seems like a great deal compared to Canadian houses. But in Florida that price is still $10,000 above the average in the area. My friend also found out she can’t work on her own house; there is a rule that only US citizens can do repairs or renovations on houses in her area.”

Other problems could cause high vacancy rates, high crime rates, or a bad local economy with high unemployment or low income where tenants can’t pay rent.

In 2013, new and significant changes will be introduced in US estate tax. According to David Altro, these changes will be expensive and onerous to many Canadians if they don’t do their homework and/or get advice. The exemption level on estate tax for owners of US property will fall to $1 million in worldwide assets from $5 million, and the maximum tax rate on US property will grow to 55 per cent from 35 per cent.

“Although the threshold may still seem high, Canadians must include in the calculation the value of their RRSPs and life insurance payable at death, which pushes a lot more people into the tax zone,“ wrote Paul Delean for Postmedia News.

What To Do Before Buying

1. Decide About the Purpose – “People need to determine if they’re going to own the property as their second home or if they’re going to buy it to fix up and sell,” says Dale Walters, an American tax accountant from Keats, Connelly & Associates, LLC, with expertise in US and Canadian tax and financial planning.
   
   The US taxes vary with how the home is used. If you’re renting out the property, there’s a 30 per cent tax on the gross rent income. Or you can choose to file a US tax return claiming expenses against rental income, which may result in a lower tax than the withheld amount.
   
   “If it’s a second home for leisure, there are no taxes aside from the regular property taxes. But when you sell it, you will have to pay capital gains tax, and the default tax on that is 10% of the gross sale price,“ Walters explains.
   
   Taxes are very high for corporations holding US property, so it‘s usually disadvantageous.
    
2. Information Needed – Get as much information as you can about the state in which you’re going to buy your new home. You can ask for advice specialists or do your own research.
    
3. Choose Your Bank – If you need a mortgage, you have to choose the bank carefully. “Canadians work with a Canadian bank in the US to obtain a mortgage. Other institutions may lend to you, but it may be more complicated,” recommends Walters.

Buying a house is a big investment, so purchasers have to be careful and aware of all the risks, otherwise losses can be unexpectedly high!