Buying U.S. vacation property brings tax consequences
Many Canadian snowbirds want to take advantage of the strong Canadian dollar to buy American vacation homes. As added incentive, real estate prices have fallen in many areas of the U.S.
Baby boomers reaching retirement age are finding a buyer's market for homes in southern states such as Florida, California, Texas and Arizona. Here are some pros and cons of buying a vacation home in the U.S.
Pro: Potential capital gain
You could be buying at the bottom of a market downturn. If you hold on to your U.S. property for the next 10 or 20 years, you would hopefully sell at a profit. Later in retirement, these sales proceeds could nicely replenish your retirement savings, perhaps at a time when you are faced with rising health-care costs.
Pro: Escape winter cold
You can golf during the winter. Living in a warm climate means you would have minimal heating costs.
Con: Health insurance
U.S. health care is costly if you are sick or have an accident. Every time you cross the border to go to your American vacation home be sure that you have adequate health insurance. Premiums rise dramatically with age and could eventually become prohibitively high.
Con: U.S. withholding tax
When you sell your U.S. vacation home be prepared for red tape. Normally 10 per cent of the gross sales proceeds must be withheld by the buyer and remitted to the Internal Revenue Service. This tax can be refunded if it exceeds your tax liability when you file a U.S. income tax return to report your capital gain.
To file a U.S. tax return you must first obtain an Individual Taxpayer Identification Number.
You must also report the capital gain, in Canadian dollars, on your Canadian tax return. Remember to convert the U.S. dollar purchase price and sales proceeds at separate currency exchange rates, one for the time of purchase and one for the time of sale.
Con: U.S. estate tax
If you die while you own your U.S. real estate, your executor would normally have to file a U.S. estate tax return. As well, to be able to sell your property your executor would normally have to "reseal Letters Probate."
Suppose most of your property is located in Saskatchewan, for example, but you own a vacation home in Arizona. The Saskatchewan court document called Letters Probate only gives your executor authority over Saskatchewan property. More probate fees would have to be paid in Arizona to give your executor authority to deal with your property in that state.
Con: Lack of liquidity
You or your executor must be patient, in a normal real estate market, if you expect to receive fair market value from a sale. Unlike a mutual fund portfolio, you may not be able to turn your vacation home into cash in a hurry if the need arises.
Most professional advisers are not well versed in cross-border estate and tax planning strategies. U.S. advisers primarily deal with U.S. citizens while Canadian advisers know Canadian property rules.
A good resource for financial planning advice on cross-border issues is a book called The Canadian Snowbird in America by Terry Ritchie. He has been working with Canadian snowbirds for 20 years. His book is a valuable guide for Canadians who spend time or invest in the United States.
You can visit Mr. Ritchie's website at www.transitionfinancial.com to learn about the facts, myths and scams that face snowbirds.
In summary, buying a vacation home in the U.S. at a bargain price is probably best seen as a lifestyle decision. Considering the red tape involved in selling, don't view the purchase solely as an opportunity to make a quick profit.
Terry McBride is secretary of the local chapter of Advocis (The Financial Advisors Association of Canada). He works at Raymond James Ltd., a member of the Canadian Investor Protection Fund. Raymond James Ltd. does not endorse, warrant or guarantee the services or information offered at the above mentioned website. A recommendation of any strategy would only be made following a personal review of an individual situation. Seek independent advice for your tax-related questions.