Ice storms, snowstorms, and throw in a polar vortex. Even by Canadian standards, this winter has been brutal. Your client has had enough, and decides to purchase a property down south.
Why not propose Arizona or Florida? That’s where most Canadians buy in the U.S. due to affordability and the warmer climate, says Fred Cooper, a senior vice-president at Toll Brothers, a New York City-based luxury homebuilder.
“They’re more resort-like and are considered destinations for second home buyers,” he says.
Cooper suggests the Naples, Orlando or Palm Beach areas in Florida. Properties range from $300,000 to $2.5 million, depending on location. Prime spots are near the waterfront, city or a golf course.
“It’s a good time to buy in the U.S.,” he adds. “The economy is just starting to recover and you’ve got a shortage of production.
“If you’re able to buy a house in one of the markets where everyone wants to live, and you’re looking for a longer-term investment, then it’s an interesting time to invest during the early stages of the housing recovery.”
Source: N. Gregory McNally & Associates Ltd., Global Property Guide
Rent, hold or flip?
Of course there are income tax considerations, but the client’s exposure varies depending on his or her plans for the property. An investor buying property with the intention of renting it out has to file form 1040NR, a U.S. non-resident income tax return. On it, he’ll report gross income from the property but can deduct expenses, including insurance, utilities, mortgage interest, property taxes, repairs and maintenance.
Unlike Canada, however, the U.S. requires taxpayers to depreciate the value of rental properties, says Terry Ritchie, director of cross-border wealth services at Cardinal Point Wealth Management in Calgary. That’s a good thing, because it lowers the tax bill.
To calculate the depreciation, take the full value of the building (excluding the value of the lot it sits on), and divide it by 27.5, the number of years the IRS sets as the useful life of a rental property.
“You have the income [and] expenses, and then you throw the depreciation number in there, and you might have a loss,” says Ritchie.
He adds, “But you still have to file an annual tax return. If you don’t then the IRS can file it for you, and they won’t deduct expenses. So you’ll end up paying tax on the full rent.”
Ensure clients file both U.S. and Canadian tax returns, which must include all U.S. property. In Canada, use form T1135, the foreign income verification statement.
“You’re obligated to disclose the fair market value of the property and the income that’s generated,” says Ritchie. “If you fail to do so, CRA will assess a penalty—the maximum is $2,500.”
If your client’s buying with the intention to flip the property—doing significant renovations to boost value and then selling it quickly to a new owner—advise him to keep copies of all expenses incurred.
“That’s going to bring up costs,” he says. “So when he sells, he’ll only pay tax on the difference between the adjusted cost base and the sale price.”