The loonie is above parity with the U.S. greenback, and U.S. real estate is under water. You wouldn't be the first person to think a due-diligence trip is in order to snap up properties costing as low as half their pre-meltdown price. But before booking your flight, take a look at the tax implications.
“It’s important for the Canadian to have a clear understanding of what their overall objective for buying the property is,” says Terry Ritchie, a financial planner with Transition Financial Advisors Group, and co-author of The Canadian Snowbird of America. His firm specializes in cross-border financial planning.
If the property is being used for personal reasons, there are generally no annual U.S. or Canadian income-tax implications until the real estate is sold or rented out.
Tax reporting kicks in when the property is used for investment purposes. Landlords must file a U.S. income-tax return every year and can deduct any reasonable expenses from the rent they receive, says Mr. Ritchie. If you and your spouse are joint owners, then you both must file a return by June 15 of the year following the rental activity.
You’ll also have to think about the cost of depreciation on the property, which is mandatory under U.S. tax laws. “In many cases, when depreciation is factored against the other expenses, most Canadians might see a net loss for U.S. tax purposes,” Mr. Ritchie says. Loss or not, you still have to file a return.
Once you sell your real estate, you may also have to file a state tax return, depending on where it is. You could also face a 10 per cent federal withholding tax on the proceeds, though that may be reduced. You can claim a reduction or an elimination of the tax entirely, for example, if you sold at a loss. You’d have to file separate forms to get that money back from the government.
And it doesn’t end there: Your estate may also need to pay U.S. estate taxes. However, most of us won't have to worry too much about this as it generally only applies if your worldwide estate is over $5-million individually or $10-million as a couple.
Mr. Ritchie's last bit of advice is to “make hay while the sun shines.”
The loonie is rising. As of noon yesterday, it was worth about $1.03 U.S., its highest position in three years.
The combination of a high loonie and low real estate prices might be as good as it gets, so seize the opportunity now and avoid the temptation to speculate on future currency and real estate price moves.
But I caution you to find a professional well versed in cross-border real estate investments or you could find your sunny southern investment parade being rained on by the tax and administrative headaches.
U.S. prices, then and now
Median market value for a home in four U.S. markets adjusted to Canadian dollars:
Fort Lauderdale
Dec. 1, 2006: $399,451
Dec. 1, 2010: $172,500
New York City
Dec. 1, 2006: $553,966
Dec. 1, 2010: $457,178
Upper West Side, New York
Dec. 1, 2006: $1,081,606
Dec. 1, 2010: $917,098
San Francisco
Dec. 1, 2006: $901,911
Dec. 1, 2010: $680,788
Seattle
Dec. 1, 2006: $516,195
Dec. 1, 2010: $349,690
Sources: Zillow.com, Bank of Canada
Preet Banerjee is a senior vice-president with Pro-Financial Asset Management. His website is: WhereDoesAllMyMoneyGo.com
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1 comment:
Excellent article on buying U.S. Real Estate. I also like the way you explained the tax implications for Canadians buying real estate in U.S.
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