by Julie Broad
I can’t tell you the number of times Dave has come home from shopping with something he didn’t really need, or something that didn’t quite fit but he bought it anyway just because it was on sale!!He’ll buy a pair of pants that are a little too short or a little too tight just because they are 50% off. Or he will buy a jacket with a collar that has one side sticking up and one side laying flat just because it’s a clearance item.
Then he gets them home and tries to actually wear them and complains the whole time that it doesn’t fit or the collar gets on his nerves.
In other words … the only reason he bought the items was because they were on sale not because they really fit his needs.
And that is what some Canadians seem to be doing these days as they rush down the the US and buy property. With the Canadian dollar so strong, our economy holding steady, and the house prices in the US so much lower than they’ve been in years, many Canadians think their favourite destinations like Palm Springs, Phoenix, and various places in Florida are experiencing the biggest Boxing Day like sale EVER. And they rush down in a frenzy to buy a place …. or in some cases they don’t even rush down they buy without ever seeing what they are picking up!!
If you are even remotely considering US property as an option in the next few years then you absolutely must pick up the new book by Philip McKernan called South of 49.
It’s an enjoyable read told through the story of a fictional character named Ted who decides he wants to buy in the US. And he nearly does just what I am describing above … rushing down to join in on the big US property sale that is happening.
Through the coaching of a good friend of Ted’s, named Sid, and the level headed nature of his wife Nancy you are taken through the steps of what is involved in buying US property as a Canadian. Through the story of Ted and Nancy it becomes very apparent early on that it’s even more important to start with a plan and a clear understanding of WHY you want to buy property in the US.
The biggest issues to get a handle on before you buy a property in the US are:
- Will this be an investment or a lifestyle property? The answer to this will make a big difference in where you buy as well as potentially how you hold the property. You’ll also want to make sure you get tax planning advice because you could be subject to taxation in 2 countries if you haven’t set everything up right for an investment property.
- Where do you want to hold the property? Be sure to consider the ease of access from your Canadian home as well as the other things you’re looking for.
- How the property will be held.
- Financing options (most people get financing in Canada to pay cash for their property in the US but there are financing programs available to Canadians in the US if you put a large amount of money down on the property).
- How much time you plan to spend in the US. This is similar to whether it’s going to be a lifestyle property or an investment property but when you read about Nancy and Ted you’ll realize just how important it is to talk about this and think about this. Does owning a place in the US mean you will only vacation in the US? If you have big dreams of an African Safari or Paris in the springtime then you have to consider that.
Ultimately, I think you should treat this purchase like you would any other real estate investment. Start with your goals. Complete good market research to identify where you want to buy. Begin building the team you’ll need to buy in that area as you search for properties, and then buy your property. To do this properly, I believe, you will have to visit the area you choose to buy in several times and see a lot of properties in those visits.
Then… besides following that process and devoting time and effort to the market research, I believe the next biggest thing you need to take care of is understanding the tax implications of what you buy. And you’ll want to set yourself up in a way that allows you to minimize the tax burden.
Here’s a few things I didn’t know:
- The rent you earn on a US investment property is charged a 30% withholding tax. This is on the gross rent! Your property management agent is required to deduct this. This is no matter where the transaction takes place or whether the tenants are Canadian or American.
- To avoid this you may choose to treat your rental income as income connected with a US business instead. This allows you to pay your taxes on the net revenue (after the expenses are paid). Doing this requires you to file an annual return in a timely and accurate manner each year until you get an approval to revoke this. If you fail to file on time you can be required to pay 30% on the gross amount for that year.
- When you sell your US real estate a withholding tax of 10% of the sale price is payable under the Foreign Investment in Real Estate Property Tax Act of 1980. There are exceptions to this, however, that you will want to understand.
There is a lot to consider when buying an investment property …. especially when you’re looking to do it in another country. If you are a Canadian looking to buy in the US then you should definitely pick up a copy of Philip’s book. And all of the proceeds from the book sales are being donated to helping children in Sri Lanka.
By the way – I’m working on getting Philip and a couple of other experts on the phone in the coming months to talk about this subject. If you’re interested make sure you subscribe to our Rev N You with Real Estate newsletter so you get the invitation to join those calls!!!