Looking to find your place in the sun? With real estate values falling in many U.S. hot spots and the Canadian dollar flying high, this could be your opportunity. Here’s what to consider before you buy.
Flip through the weekend real estate section of your newspaper and you’ll likely see what is a growing trend – advertisements for homes and condominiums in the sun spots south of the border. Canadians have become the target of U.S. developers and property owners desperate to sell. Property values have slid downward by 40% or more in areas such as South Florida. After more than doubling from 2000 to 2005, prices in California are down by about 30%. In February, the Cape Coral – Fort Myers metro area had one out of every 84 houses in some form of foreclosure – the highest in the nation. Combine this with a slowdown in the U.S. economy and a rise in unemployment and it’s not surprising that Canadians look like a fertile market. After all, with our long winters, the southern U.S. has always been a prime destination for Canadian vacationers and retirees. Now with our dollar at or near par with the U.S. dollar, forward-thinking baby boomers and recent retirees are taking the plunge.
Gayle Harris, Senior Vice President at T.E. Wealth in Calgary is one such Canadian. Already experienced in vacation property ownership, Gayle and her husband, who is in the real estate business, had been toying with the notion of a future retirement property in a warmer climate with the idea of becoming snowbirds in retirement. Recently, due to her husband’s work, they had the opportunity to live and work in southern California for part of the year and try the lifestyle on for size.
Know what you are looking for
With all of the opportunities available, Gayle says it’s important to know what you are looking for. She cautions that because the value for price can be staggering, especially if you are coming from a major centre such as Vancouver, Calgary, Toronto or Montreal, the temptation to pick up a bargain without really knowing what you want can be great. “I knew I wanted a community that I could settle in to, that would provide me with easy entry into a social network and access to recreation and cultural stimulation,” explains Gayle.
Implications of owning U.S. property
Settling on a home in a Sun City community in Palm Desert, Gayle has experienced the challenges of purchasing property in the U.S. first hand. As Gayle points out, the closing process differs from Canada in that escrow companies handle the closing rather than lawyers. But because it’s a buyer’s market, some developers are picking up closing costs. “If you are planning to finance the home purchase be aware that your Canadian credit history does not carry over to the U.S. and this makes getting credit cards, loans, mortgages and even cell phone accounts difficult,” said Gayle. But by far the biggest implication for Canadians purchasing property in the U.S. is the potential impact on their estate.
Estimate U.S. estate tax exposure
“Before you purchase, you’ll want get an estimate of your U.S. estate tax liability so that you have a good idea of what your exposure is likely to be,” explains Gayle. According to Michael Giacomodonato, T.E. Wealth’s specialist in expatriate issues and a Vice President in the Montreal office, Canadians who own real property in the United States can be subject to substantial U.S. estate tax.
In addition to real estate located in the U.S., real property includes tangible assets located in the U.S. such as furniture and automobiles, shares of U.S. corporations, irrespective of where they are held and U.S. shares held in an RRSP and RRIF. Excluded are: U.S. government bonds, treasury bills and bank deposits, and the proceeds of life insurance policies. U.S. real property can be excluded for estate tax purposes when it’s held through Canadian partnerships, Canadian corporations and Canadian mutual funds.
“As soon as the value of U.S. property exceeds US$60,000, you need to determine the impact of U.S. estate tax on your estate,” says Michael. Under current regulations the value of the taxable estate is the gross value of the deceased’s property situated in the United States, minus certain allowable deductions. Americans have a US$2-million exemption that helps to reduce their taxable estate but Canadians can only partially benefit from this exemption based on the ratio of their U.S. assets to their worldwide assets. For example, if your worldwide assets total $5 million and your U.S. property is worth $500,000 or 10% of your worldwide assets, your estate tax exemption would be 10% of US$2 million or US$200,000 and therefore your taxable U.S. estate would be US$300,000. Taxed at the current rate of 45%, that represents a cost to your estate of US$135,000.
You can reduce the exposure to U.S. tax by holding the asset jointly with your spouse but you must be able to prove that your spouse used his or her funds to purchase the property. Another option is to purchase life insurance to cover the tax liability. And as Gayle points out, if you hold your U.S. dollars in U.S. denominated Canadian investment funds, you can keep these assets out of your taxable U.S. estate.
No one is predicting a reversal of U.S. real estate fortunes any time soon so be sure to do your homework before you buy. Remember, if you buy in haste and change your mind, you may find yourself in the same boat as current homeowners, slashing prices to attract buyers.
If you are considering purchasing property in the U.S., be sure to consult your T.E. Wealth consultant. He or she can introduce you to U.S. tax, legal and estate professionals and assist with the process.
These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.