What to do with that Florida condo

By Susan Goldberg | January 28, 2016 | Last updated on January 28, 2016
5 min read

Those who bought U.S. real estate when prices were low and the loonie was strong now have potentially lucrative options when it comes to their warm-weather retreats. Here’s what to do if you were one of them.

Option A: Sell

Say you paid cash for a Florida condo five years ago for US$100,000, when the loonie was at par. If you sell for US$200,000, not only do you make US$100,000 in profit, but with the Canadian dollar worth 70 US cents, you’ll gain an extra CA$86,000 when you convert that US$200,000.

Pros: “It’s very difficult to argue with such an amazing return,” says Shlomi Steve Levy, executive VP of MCA Cross Border Advisors and a partner at Altro Levy LLP.

Cons and considerations: You’ll have to pay capital gains tax not only on the profit but also on the additional income generated by exchanging it, since you must report your gain in CAD. The most likely buyers, notes Levy, are Americans who will also want to take advantage of the Canadian thirst for US dollars. “They know that they can negotiate harder because Canadians are still going to make a lot of profit even if they knock $20,000 off the price.”

And, of course, there’s a vicious cycle of the real estate market: more Canadian-owned condos on the market means more supply relative to demand, which in turn will drive down prices.

The biggest con for snowbirds, though, might be the loss of a retreat. Many may find it difficult to get back into the market, or that renting at current exchange rates is prohibitively expensive.

Option B: Rent your place

If you’d like to hold onto your vacation home but want to take advantage (or offset the pain) of the current exchange rates, one option is to rent it out while you’re not there.

Pros: You can generate U.S. income to help offset the costs of upkeep and Stateside living expenses, while holding on to your property.

Cons and considerations: You’ll have to declare that rental income to both the Internal Revenue Service in the U.S. and report it as worldwide income to the CRA. Talk to an accountant or tax lawyer well-versed in cross-border taxation issues, says Levy, in order to avoid double taxation.

Becoming a landlord carries its own risks and obligations. In addition to tenant insurance, you’ll need to be covered for liability: what if your tenant slips and breaks her neck and sues you for millions? Liability coverage in the U.S. typically doesn’t go higher than $500,000, says Levy, so “you need properly structured liability protection mechanisms beyond insurance” to protect not only against losing your U.S. assets but also to guard against exposure to lawsuits that may threaten your Canadian assets as well. That may mean, for example, structuring yourself as a limited partnership or an LLC. Again, seek the advice of the cross-border expert to make sure matters are handled correctly on both sides of the border.

Keep in mind that in some states, like Florida, renting for less than six months obligates you to charge a state and tourism tax, and remit that money to the state.

As well, Canadians who own foreign property valued at more than CA$100,000 have to report it on the CRA’s form T1135. While there’s an exemption on personal-use property, rental units must be disclosed.

Option C: Refinancing

If you own your property outright, it may make sense to remortgage and get cash out of it. Typically, a U.S. bank will lend somewhere between 50% and 75% of the appraised value of the property.

“In a perfect world,” says Levy, “a Canadian would borrow and refinance in the States, bring that money back to Canada to take advantage of the exchange rate, use that money to invest, and then deduct the cost of borrowing from the profits.”

Or you could double (or even triple) up on strategies: if you refinance the property, invest the money in Canada, and rent out your home while you’re not there, you can use the rental income to maintain the place and pay down the mortgage. At that point, says Levy, “you’ve maximized your leverage of the currency exchange. You’ve completely eliminated the cost of borrowing and completely eliminated the risk of currency fluctuation.”

Pros: If you’re refinancing rather than selling, the income generated by exchanging your dollars doesn’t count as capital gains, and so you don’t pay tax on when you exchange your greenbacks for Canadian dollars. You get to hold on to your vacation property.

Cons and considerations: You’ll likely want to keep some of the money from the deal in the U.S. to cover the cost of your property’s upkeep and service your debt. Keep in mind that your ownership structure needs to be in line with banks’ requirements. Many banks, says Levy, don’t like to lend to trusts or corporations.

Also note that interest rates in the U.S. are slightly higher than they are in Canada. And you’ll need to pay closing and other costs associated with the new mortgage.

Option D: Downsizing

Say that, back in 2011, you bought a three-bedroom condo for US$400,000. Now it’s appreciated to US$800,000. It may make sense to downgrade and pocket the difference.

Pros: Assuming your property’s value has gone up, you make a tidy profit while still retaining equity. You get the bonus of the advantageous exchange rate, and you still have a warm place to travel to every winter. What’s more, you can rent out your property when you’re not using it or refinance it at a later date.

Cons and considerations: You still have to pay capital gains tax on proceeds from the sale, as well as on any money you make repatriating cash to Canada. The selling season is coming to a close: by March and April, buyers have left the sunshine states for home.

Susan Goldberg headshot

Susan Goldberg

Susan is an award-winning freelance writer and editor based in Thunder Bay, Ont. She has been writing about personal finance for more than 20 years.