You’ve been looking at all those great values in US real estate and the premium value of the Canadian dollar. You’ve been thinking that now may be the time to buy before prices start to rise or all the bargains are scooped up.
You’ve studied the decline in housing prices in the US Sun Belt and worry if this is the right time to buy. Prices in Florida, Arizona, Nevada, and California are as much as 55% below their peak in 2007 (Wall Street Journal – July 7, 2011).
Is now the best time to buy – who can possibly know for sure? According to the Wall Street Journal home prices in 27 major markets continued to fall in the first quarter of 2011. But the market will turn around soon won’t it?
The simplistic answer to that question is it depends on your definition of “soon”.
Now of Sept 2013 Prices are rising quickly and its never been a better opportunity to purchase a new Home than now .
The purpose of this article is to neither encourage nor discourage you to purchase a US residential property but to outline out some of the potential pitfalls and some of the procedures you need to be aware of – before you write any cheques.
The very first thing you should do is get expert advice before making any decisions. There are very different tax regulations in the US that could significantly affect you personally or your purchase decision. For instance, do you plan to spend lengthy periods of time in the US, do you plan to use it as a vacation home, do you plan to rent it to another party for all or part of the year, or will it be vacant for a significant period of time during the year. Know what you are getting into – before you’re in over your head. The international tax specialists at Aylett Grant will fully explain the tax and residential status implications that will affect you personally if you purchase a US residential property. If you go ahead with your purchase plan the Aylett Grant cross border tax specialists can look after your continuing tax matters to ensure your worry free enjoyment of your new property.
A major roadblock you will encounter will be obtaining a mortgage on your intended purchase. Mortgage financing in the US is very tight due to new regulations enacted to ensure there will not be another mortgage meltdown. Also, you are a nonresident alien and most US lending institutions will not lend to you. The Harris Bank owned by the Bank of Montreal or the Centura Bank owned by the Royal Bank or the TD Bank may be your best possibility but you will still need a 30% down payment. To obtain a US mortgage you will need to submit mortgage statements on your Canadian property, Canadian (and US if applicable) tax returns, employment information, asset statements (e.g. brokerage accounts), and complete bank statements with your application. Many advisors recommend that you arrange financing in Canada (re-mortgage your Canadian home, borrow against your Canadian assets, etc.) and pay cash for your property in the US. This will give you financial stability and eliminate any future exchange rate surprises. If you plan to pay cash for your new US home, make sure all the money is in a single account for at least 90 days before closing. When you show up in the US with a large amount of cash it will be reported and investigated under US money laundering and anti terrorist laws. You should allow at least 45 days for the money to clear and the sale to close to allow time for the title to be fully searched.
As in any real estate purchase the location that you choose will significantly affect your enjoyment of the property, its current rentability, and its future saleability. Where you decide to buy, of course, is up to you but you should consider the following:
Be sure to visit properties in person so you know exactly what you’re buying. A home inspection is an absolute requirement! Many foreclosed homes have been trashed or are in deplorable condition. If you intend to buy a fixer-upper get detailed estimates of repair costs and add a significant contingency fee before determining your offer.
Now that you have decided where to purchase you need to be cautious of what you purchase.
Before you take the next step you need to understand that various ownership mediums that are available to you. You can purchase the property personally, set up a limited liability company or partnership, or set up a cross border trust to hold the title to the property. Each may have a particular advantage depending on an individual’s particular circumstance. For instance, a company’s shares can be sold or transferred without actually selling the property and may be subject to a different taxation policy than a real estate sale. A cross border trust may facilitate the settlement of your estate if you intend to pass the property on to your heirs. In fact, your estate plan should be an important factor in your decision to set up the appropriate ownership vehicle for you. Before you make your final decision make sure that you understand how the various structures are taxed in both the United States and Canada
The tax specialists at Aylett Grant can review your particular circumstances and advise you on the best ownership vehicle for your individual intentions and circumstances. We will brief you on the various ownership structures and the tax implications of each as it applies to your individual circumstances so that you can make a fully informed decision on the best way to hold the title to a US property.
You have found the ideal property, decided on the appropriate ownership medium, and you intend to submit an offer. This is a cautionary note: if you think your ideal property just needs a little fixing up that you can easily do yourself you should be aware that you can be deemed to be conducting a business in the United States and violating US immigration laws. You should factor into your offer to purchase the cost of a US contractor completing all necessary renovations and repairs.
Before you submit your offer you are strongly advised to consult an experience lawyer that fully understands the ramifications of cross border real estate transactions. A lawyer can guide you and advise you on what actions you must take including the appropriate deposit and how to protect it in case the offer is not accepted or the seller is unable to deliver clear title. A lawyer can fully explain the legal ramifications of the various legal forms that you will be required to sign.
Submitting your offer is, metaphorically speaking, the point of no return. Mistakes at this point will be expensive and difficult to correct. Now is the time consult the professionals but you should be as careful selecting your lawyer and other agents as you were selecting the property that you intend to buy. You should be aware of the conduct of some agents, brokers, and appraisers leading up to the mortgage meltdown. You will need to carefully consider the following:
Congratulations – you are now the proud owner of a new US residence. There are just a few more things you must do to protect yourself and your new property:
If you have not yet received expert tax advise now is the time to do it particularly if you intend to rent your new property for any part of a calendar year. If you have decided to rent your property you can avoid the 30% withholding tax by electing to pay US income tax on net rental profits.
The cross border tax specialists at Aylett Grant can assist you with all your cross border tax matters to ensure that you do not run into unexpected tax and residency problems. The penalties that the IRS can apply are severe and punitive. You can be assessed a $500 penalty for a careless mistake or fined $10,000 for failing to file any form the IRS requires from nonresident aliens (that would be you). Ignorance is not an excuse readily accepted by the IRS.
In the United States the IRS does not act as a tax agent for the individual states as the CRA does in Canada. Many states have their own tax laws that may be similar to or parallel the IRS filing requirements. However, state laws vary from state to state and specific advice may be required for your new state.