Derrick Penner
Sun
Big Canadian real estate gains and a favourable exchange rate against the U.S. currency may make prices in a lot of American markets attractive, but there are pitfalls that potential buyers need to be aware of once they cross the border:
– Similarities and differences
Whatcom County realtor Mike Kent said finding a house and making an offer works the same way in the U.S. as it does in Canada. The buyer and seller draw up a simple sales contract that is used to guide the transaction, also just like in Canada.
However, instead of using lawyers to handle transactions, Kent noted that Americans use the services of land-title companies and escrow firms to convey properties.
Phil Laird, a Langley resident who recently bought property in Birch Bay, said the costs and fees involved in the transaction are different as well. Most closing costs also fall on the seller, so he only paid fees of about $700 on his purchase of a $266,000 US four-bedroom house.
– Financing
Kent said Canadians can’t get mortgage financing from Canadian banks on U.S. properties, because they wouldn’t be able to foreclose on the property if a buyer defaulted on the loan.
Instead, Canadian buyers he has worked with take out home-equity loans against Canadian property that they own. Or, if they can put a minimum of 25 per cent down, Kent said obtaining a mortgage from a U.S. bank usually isn’t a problem, and people can still get 6.5-per-cent interest rates on 30-year fixed mortgages.
However, Cathy Digby, a mortgage broker with U.S. Bank Corp. in Blaine, Wash., warned that Canadians, as foreign buyers, wouldn’t qualify for the full range of mortgage options that Americans do.
U.S. mortgage lenders typically package their loans as “portfolios,” which they then sell on investment markets. Canadians would only qualify for loans that the banks themselves hold.
Laird said buyers also need to shop around for the most favourable exchange rate. He used a currency-exchange broker rather than a bank, which saved him about $3,000.
Laird added that Canadian buyers also need to make sure they give themselves a lot of time and warn the land-title firm handling the conveyance that theirs is a cross-border transaction.
If you are buying with cash, or taking out a home-equity loan in Canada, you can’t simply drive across the border carrying a $266,000 bank draft. You have to wire the money between accounts in Canada and the U.S., and all foreign wire transfers have to go through New York.
– Taxes
Different tax laws offer the biggest pitfalls where Canadians can get themselves into trouble with their American real estate purchases, according to Robert Keats, a cross-border financial planner with the firm Keats, Connelly and Associates in Phoenix.
For instance, adding a spouse to the title of a property is an ordinary transaction in Canada that doesn’t have immediate implications. In the U.S., however, that triggers gift taxes.
On a property worth $500,000, Keats said tax laws deem that the property-owning spouse has given the other spouse $250,000, which can result in a charge as high as $50,000.
Similarly, if a family wants to add their children to the title of a property, it would trigger taxes in both the U.S. and Canada.
If a Canadian property owner wants to rent out the U.S. property when not using it, Keats added that the owner would have to obtain an American social security number and file a U.S. income tax return.
Also, Canadians tempted to own their American property through a corporate entity are setting themselves up for a bigger capital-gains tax hit than they would in Canada. The U.S. corporate capital-gains tax rate is 34 per cent, versus a 15-per-cent rate personal capital-gains rate.
Probating wills involving Canadian-owned U.S. properties and estate taxes, both at the federal and state level, are other issues Canadians have to be aware of.
Keats outlines all the issues in detail in a book titled The Border Guide: A guide to living, working and investing across the border.
© The Vancouver Sun 2007
