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Cross-border cottage: What to consider when buying in the U.S.

Gail Johnson
Pay Day

With the fallout from the U.S. housing crisis resulting in record-low prices, Canadians may be tempted to buy a cottage south of the border. But is it really worth it?

Aside from crunching the numbers and factoring in some sobering tax considerations, you have to think hard about logistics.

“You need to decide if you're investing in the U.S. or if you're buying a lifestyle,” says Nanaimo, B.C.-based real-estate-investor and consultant Julie Broad, of Rev N You with Real Estate. “Most people allow themselves to think of a house in Palm Springs as an investment when really it’s a lifestyle choice.

“The biggest consideration is to think about whether you’ll be able to use it enough to justify the costs,” she adds. “And are you OK spending most of your vacations going to the same spot in the U.S.? Because if you like variety in your vacations, committing yourself to one spot may not be the right fit for your life.”

Then there are those tax and other financial factors: American taxes, estate taxes in Canada, and insurance costs.

“Those are three top things I discuss with clients when they’re considering purchasing property down south, and I usually try and dissuade them from it,” says Jolene Laing, a White Rock, B.C.-based associate director of global wealth management at ScotiaMcLeod. “There is so much risk involved in so many ways.

“There’s obviously the currency and the real-estate risk,” Laing adds. “Although the U.S. market seems low today, it seemed low two years ago, and it’s much lower now than it was then. Plus you have the fact that the exchange rate is totally volatile. Our exchange rate can fluctuate … by up to about 20 cents.”

The tax considerations from the U.S. side include a government regulation stipulating that, if you own an American property when you die and your worldwide assets are worth more than US$2million, that property is subject to a staggering 45-per cent estate tax.

“It is entirely possible they [the U.S. government] will also charge beneficiaries of the property a gifting fee,” Laing says. “So owing a U.S. property technically can expose your entire worldwide estate to the U.S. government. That’s shocking to most people.”

If you own a place and plan on renting it out, that comes with a big tax hit as well.

“You either need to forgo an immediate 30 per cent withholding tax on all gross revenue and/or you have to have U.S. social security number and file a U.S. tax return,” Laing notes. “That’s one step most people don’t think about.”

Furthermore, in some states — particularly hot ones that Canadians snowbird to — property taxes are significantly higher for those who aren’t permanent residents.

And there are more taxes on this side of the border when you sell a U.S. property.

“The Canadian government will consider the capital gain that you earned and will tax it accordingly, and that income will also be subject to American capital gains tax,” Laing says.

Travel insurance is imperative if you’re going to be spending any time in the United States.

“Most policies only cover a person for up to 30 days,” Laing says. “Long-stay insurance policies can be pretty costly, but they’re essential. It’s an added fixed cost.”

Then there are possible monthly condo or resort fees or the expense of maintaining the property year-round.

If you’re still keen, Broad urges due diligence.

“Complete good market research to identify where you want to buy,” Broad says. “To do this properly, I believe you will have to visit the area you choose to buy in several times and see a lot of properties in those visits.

“Begin building the team you’ll need to buy in that area as you search for properties,” such as an experienced lawyer and accountant, she adds.