Choosing a property

There's no doubt, there's a lot of choice in the U.S. real estate market. The cheapest deal, however, isn't always the best one. Before starting out, consider the following.

Personal use or investment? If you want a home as a family retreat or for your retirement, any near-term action in home prices might not concern you. But as an investor looking for a quick gain, recognize that the market may fluctuate.

Location, location, location. Keep in mind, not only are you buying property, you're also buying location. Are you within a reasonable driving distance or an easy flight away?

Neighbourhood and area characteristics. While you're carefully examining a home's condition, study the neighbourhood too. View the property on several occasions, at different times of the day and on weekends. Drive around the community and determine what amenities and services are in the area. See how neighbouring properties are maintained and research the local crime rate. If there have been a number of foreclosures and vacant homes, the ambience of the neighbourhood may be in decline while the crime rate may be on the rise.

In hotter climates like Arizona, a termite inspection on a home is a must. Buying in coastal areas prone to hurricanes and floods can mean higher insurance costs.

Investment considerations. If you're an investor, look into vacancy rates and average rents. Are resale prices stable or, even better, going up? If so, you'll have a better chance of getting out if necessary without taking a loss.

Understanding the buying process

The easiest way to buy in the U.S. is to pay cash with savings you've set aside. Alternatively, you can tap into the equity you have in your home or other property in Canada. Where financial institutions may not finance your U.S. property directly, you can borrow against your current home to free up the needed cash.

What about borrowing from a U.S. financial institution instead? While there are signs that U.S. lenders are making credit more readily available, mortgages can still be hard to get especially if you're not American. Expect to submit mortgage statements for your Canadian property, tax returns, banking details and information on your assets. You'll likely need more money down than you would at home. What's more, U.S. lenders may not recognize your Canadian credit history.

In addition, securing financing for a foreign buyer can be a lengthy process. What takes a few business days in Canada can take up to three months stateside. And as a non-resident purchaser without a U.S. credit history or significant American assets, don't expect to get the best deal on rates.

Before you make an offer, check and double-check title. Irregularities in the mortgage and housing markets have created situations where purchasers made down payments, only to find that the sellers, banks among them, didn't have clear title. Be extra careful there are no hidden liens.

Taxes and owning U.S. property

Holding U.S. real estate can have tax and estate implications that can be quite different than what you'll find in Canada.

Estate tax

Estate tax, also known as the “death tax”, is imposed on your U.S. assets when you die. As a Canadian, you may be subject to U.S. estate tax even if you're not a U.S. citizen. As long as you own qualifying U.S. property, including real estate and shares in American corporations, you could be affected.

In Canada, our tax system only targets accrued gains on capital assets upon death. In the U.S., taxes are levied on the entire amount of the assets involved.

An exemption under the U.S.-Canada tax treaty means you won't have to pay any estate tax in 2012 if your worldwide assets are under $5 million. If you're above this limit, your estate could be saddled with thousands of dollars in extra tax. Proposed changes for 2013 would reduce the threshold to $1 million which could lead to even higher tax bills for Canadians.

If your heirs don't plan on selling the home, they'll have to come up with other ways to pay the taxes. Buying life insurance^† sufficient to cover any capital gains and estate taxes can be an effective way to handle this risk.

The estate tax raises the issue of how to hold your U.S. property. While you might be inclined to own it personally, it's only one option. You could buy the home through a trust or partnership to keep the home out of your estate helping you avoid estate tax, but there may be other advantages and disadvantages to weigh. It's important to get professional guidance to understand how each ownership structure is treated in both countries to make the best decision.

Tax on rental income

If you're thinking about real estate in the U.S. as an income opportunity, you're not alone. But as a Canadian, becoming an American landlord brings tax complications.

Renting out your U.S. property, for all or even a part of the year, means paying tax to the Internal Revenue Service on your rental income. Here, you have a couple of options.

The simple way is to pay a withholding tax amounting to 30% of your gross rental income. Another approach that could mean more paperwork but is likely to save you money is to file a U.S. tax return. This way you pay tax only on your net rental income. The savings come from deducting expenses like mortgage interest, maintenance, home insurance premiums and property taxes from the income you've received.

Paying tax in two countries

If you file a U.S. tax return, remember that doing so doesn't eliminate your obligations here at home. You're taxed on your worldwide income regardless where it's earned. That means paying tax in Canada on rental income from your U.S. property and on any capital gains should you choose to sell. The good news is the Canada Revenue Agency lets you claim a credit for taxes paid in the U.S. to help you avoid double taxation.

This article has reviewed some of the key issues around purchasing and owning U.S. real estate. But there's more to learn. It's important to get sound advice from professionals experienced in cross-border legal and tax matters. Your BlueShore Financial financial advisor has a network of experts who can help ensure you plan your U.S. property purchase wisely.