Tax Realty Consultant

Your American home
Is it really the perfect time to buy a U.S. residence?

Buying real estate in another country means you must face a variety of legal, fiscal, regulatory and social challenges. Here are some things to consider before you buy:

* Do your research. Find out about legal and tax issues, local amenities, who your neighbours would be and how safe the area is. It might be a good idea to rent the first year to determine if the location is right for you.

* Take the time to meet people who don’t have a vested interest in your buying decision. In addition to realtors, talk with the local chamber of commerce, bank managers, and U.S. estate planning specialists and accountants who are licensed on both sides of the border.

* Consider the involvement of a property management company, which could help you maintain the residence when you’re away or make it easier for you to rent it out.

* Don’t plan on staying in the United States year-round. You’ll need a visa if you stay longer than six months and you’ll lose medicare coverage. You may also need to file a non-resident tax return, depending on how much time you’re spending in the U.S. over a three-year period.

* If you’re married, you may want to put the property under the name of the spouse with fewer assets in order to avoid U.S. estate tax. It may also be wiser to borrow for the purchase, as the U.S. offers limited-recourse loans that offset the value of the property at death for purposes of calculating estate tax.

Sources: Chambers, Courtney, Brissenden, Squire

IF you’re one of the thousands of Canadian snowbirds about to spread your wings for the annual migration down south, those gold-coloured loons in your pocket will make for a most welcome flying companion.

The relentless ascent in the loonie to well above par with the U.S. greenback means Canadians will have buying power in the United States unheard of in a generation. Suddenly, there’s money for that extra week of golf in Arizona or more candlelit dinners along the boardwalk in coastal Texas.

Or maybe you can use the extra cash for an upgrade on the usual run-of-the-mill condo you’ve been renting in Florida to something with perhaps a little more pizzazz. Stainless steel kitchens and whirlpool baths, anyone?

But why rent when you can buy, as the saying goes, and the newfound heft of the Canadian dollar is providing a tantalizing opportunity to pick up some U.S. real estate at a time when the housing market there is in a major slump.

Investing in a residence south of the 49th parallel is a pretty complicated matter, though, and there can be pitfalls.

Using an exchange rate of US$1.02, a US$200,000 condo would cost a Canadian $196,000 today compared with $226,300 just one year ago. Go back five years, when the loonie was trading near all-time lows, and that same condo would have cost you a whopping $311,520.

If those figures aren’t tempting enough, consider that prices for homes and condos in many regions of the United States have dropped precipitously in recent months.

The National Association of Realtors reported last month that the supply of homes on the market is at the highest level in 12 years. That inventory is continuing to pressure prices, with the median value of a house down 4.2 per cent in September from a year earlier. Not every region is seeing a weak market, but most of the sunbelt states Manitobans are likely to enjoy, such as Florida and Arizona, have seen some significant price declines.

But is this really the right time to buy? That depends largely on two factors: Will the Canadian dollar continue to astound and climb further, and how soon will the U.S. real estate market bottom out?

Most experts feel the Canadian dollar is already overvalued and it’s time for the loonie to descend. That, of course, would suggest a good buying opportunity, but the experts have been calling for a pullback in the loonie even before parity.

And if you do purchase a home right now, you may still wind up kicking yourself if housing prices keep dropping.

That’s a distinct possibility as the fallout continues from the subprime meltdown, whereby thousands of homes are being repossessed as Americans who originally secured mortgages below prime can no longer afford their residences.

“The question becomes: ‘Is this the worst of it? Or will these things get a lot more affordable and will prices fall further?’ ” says Martin Chambers, a Wellington West Capital Inc. investment adviser in Calgary. “Certainly, with indications that the whole subprime mortgage resets aren’t expected to peak until sometime the middle of next year — I’ve heard everything from June to September — there’s going to be potentially a much greater supply of properties coming onto the market in the United States, thereby depressing prices further.

“From a strictly U.S. dollar point of view, it may be a bit early yet. It could get a lot worse in the States before it gets better, and prices could come down.”

So while Chambers suggests the timing may not be perfectly right to buy, it may be time to convert some money into greenbacks to lock in the foreign exchange advantage.

Peter Squire, a market analyst for the Winnipeg Realtors Association, is urging Manitobans to start shopping for deals.

“It’s a window of opportunity now. It may not last. If someone thinks they’re going to be in the doldrums three or four years from now, I wouldn’t count on it,” Squire says. “The U.S. economy isn’t performing all that badly; there’s just some issues with the way that whole market was financed and with the credit crunch that happened.”

Walter Boni, a Winnipeg realtor with Re/Max Executive Realty Inc., and his wife, Nancy, just snapped up a condo in the Las Vegas area after finding the local vacation property market just isn’t affordable anymore.

“To buy anything in Falcon Lake or West Hawk Lake, the prices are extremely high, and the change in the environment in the drop in value in real estate in the United States and the increased strength of the Canadian dollar has given us a lot of extra buying power,” Boni said.

“We’d like to use it one day as a vacation place to go to, but right now we’ll use it as an investment.” The condo is currently being rented out and, just like here, the common-element fee pays for upkeep and property taxes. Another benefit, Boni says, is that property taxes are about a third of what they are in Winnipeg.

John Marion, a realtor with RE/MAX Professionals Inc. in Winnipeg, terms the real estate market a bargain in the United States and says he’s seeing more Manitobans looking at actual condos instead of the more traditional trailer-park establishments.

Many retiring baby boomers, tired of maintaining cottages in places such as the Whiteshell or Kenora, are starting to consider condos down south as they make plans to downsize, Marion says.

In another new trend, some clients are thinking of splitting time between a two- or three-season constructed summer home here in Manitoba or Northwestern Ontario with a condo development in the States.

Keep in mind that buying stateside does come with some headache-inducing taxation issues that may calm your euphoria. For instance, Canadians could be subject to a U.S. estate tax of up to 45 per cent after death, especially those with worldwide holdings totalling more than $2 million, warns Jack Courtney, assistant vice-president of advanced financial planning support with Investors Group in Winnipeg. Canadians used to be able to set up a “single-purpose corporation” to hold real estate assets to avoid being exposed to the estate tax. However, that’s no longer allowed for new buyers, Courtney said. If you sell the property, you’ll also be subject to capital gains.

While Florida is a particularly hot spot for local snowbirds, it has unique taxation issues that could make the state unattractive to foreign buyers.

Under Florida legislation, permanent residents get the first $25,000 to $50,000 of the assessed value of their home tax free, and the rest of their property tax is capped at three per cent. But that privilege isn’t conferred upon visitors, notes Gerry Brissenden, president of the Canadian Snowbirds Association.

“I wouldn’t recommend anyone buying property in Florida at the moment,” he said in an interview from Toronto. “At the moment, we have many people in Florida paying up to 10 times as much as their next-door neighbour in taxes for identical properties.”

Brissenden says thousands of snowbirds are leaving Florida for this very reason and going to states such as Arizona, Texas, California, South Carolina, Georgia and Alabama.

Securing insurance can also be problem in Florida. After getting hammered by several hurricanes in 2004, a lot of private insurance companies have pulled out of the state, leaving many snowbirds without the peace of mind of coverage, or forcing them to pay extremely high rates.

http://www.winnipegfreepress.com/subscriber/business/local/story/4079410p-4679029c.html

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