Here is a very interesting guest post from a SnowBird and retired Chartered Accountant who has some great tips for buying, keeping and selling property in the United States Real Estate Market from a Canadian’s perspective. Well worth the read and feel free to share it with your SnowBird friends….or those considering a Real Estate purchase in the future.
Many people are concerned with buying Real Estate in the US and what this will mean to them financially. I have heard about concerns with proper ownership, with high closing costs, with high and increasing property taxes and with many other security and buying concerns. As a result many Canadians, particularly Snow Birds prefer to rent rather that to own. However, from our experience, these concerns are minimal and just as you are careful, use a good property inspector and buy within the capacity of your financial position the purchase and future enjoyment should be easy to accomplish and result in a very positive experience when buying a residential property in the US.
From our personal experience there are some minor differences between purchasing, owning and selling in Canada vs the US. For the best part here are the major differences as we see them:
- A Canadian’s principal residence is not subject to income tax in Canada and the interest used to finance it is also not deductible for Canadian income tax purposes. However, in Canada some of these principal residence house costs are deductible if you run a small business from your home. By comparison, as a foreigner buying in the US the home definitely is not your principal residence. When it is time to sell you will be subject to US income Taxes on the gain made from the time of purchase and in addition, as a Canadian investment, you will be subject to reporting the gain / loss on your Canadian Tax Return. For the best part you will be allowed to offset the income tax paid in the US to reduce the tax owed in Canada. For this reason, it is imperative that you have great detail over your cost of the investment in the US property. In addition, if you intend to sell the unit furnished, be sure to document the cost of the furnishings purchased and sold with the unit. Records should include your closing documents, Bank Statements, Charge Card detail, store purchase invoices – all tied in to where they were paid from you bank account.
- Besides the Gain / Loss on the residence you will most likely also face a Gain / Loss on the currency translation between the US and the Cdn Tax Returns when you sell. For instance, if you purchased a home in the US for $190,000 US when the Canadian dollar was $1.20, that would mean the Canadian price (for Canadian income tax purposes only) would be $228,000 or an extra $38,000 dollars. If you were to sell this house in 5 years for $200,000 US (when the Canadian dollar is at par) you would show that the profit made on the home is $10,000 US whereas there would be a loss on the property for Cdn tax returns of $28,000 Cdn. The US gain would be subject to US taxes whereas the Cdn loss could only be offset to other capital gains on your Cdn tax return.
- When the Canadian owner finally sells the property the US Real Estate Broker is obligated to withhold 10% of the gross sale amount for US taxes. That would mean, on the above sale, that $20,000 (10% of the $200,000 selling price) would be withheld on closing and submitted to the IRS on the seller’s behalf. That would be refunded when you file a US tax return that would show the gain is actually only $10,000 and the tax would be in the $1,000 to $2000 range. The amount of withholding by the US Real Estate Broker can be significantly reduced if the seller can produce an IRS form entitled “Request for Reduction of Withholding Tax” (prepared by a US lawyer or accountant) that shows the actual cost to be $190,000. This form has to be submitted at least sixty days in advance of closing and it is the responsibility of the foreign seller to obtain and file this request with the IRS. The form can be obtained through the IRS but it is strongly recommenced that an accounting firm or lawyer, who deals in foreign real estate transactions be involved. It is also the responsibility of the seller to give this form to the purchaser and the closing Title Company. The seller will have to prepare and submit a US tax return for the year that the sale occurs. If you paid exchange on purchasing the property this can only be claimed on your Canadian tax return after selling the property.
- If you do not obtain a “Request for Reduction of withholding tax” the IRS will withhold 30% of the gross profits upon sale. They will assume zero cost . It is in the purchasers best interest to save all receipts for upgrades to the property and also for any items that will be sold with this property.
- To go back to the tax treatment in Canada during the year of sale the US taxes paid (say $1,500) would be used to offset the Cdn taxes on the sale of the property. However, as your cost base was $228,000 Canadian and your proceeds on sale were only $200,000 Canadian (based on changes in the exchange rate at the time of disposal) then the loss of $28,000 could be used or saved for an offset to another capital gain, assuming the taxpayer has one. Otherwise the taxpayer has lost $28,000 Canadian on the sale, $1500 US (the income tax) plus the cost of filings etc. to the accounting firm of probably another $3,500.
Ideally the Canadian buyer would like a weak US $ (similar to what it is currently) when the purchase is made and a very strong US $ when it comes time to sell the property.
Doug Campbell is a retired Chartered Accountant who spent most of his working career in senior management positions involved in businesses who dealt extensively in Canadian / US transactions and currencies. He and his wife Susan reside in Oakville, Ontario, spend part of their time travelling to the West Coast of Canada where they have family and a few months a year in Orlando, Florida where they have a residence.