10 Things Canadians Need to Know About Owning Real Estate in the USA

Are you interested in investing in real estate in the United States? Whether it is for your family, retirement, investment or a rental vehicle for extra income, Canadian citizens can buy real estate in the United State without any major restrictions. 

Buying in the U.S. can be very appealing to Canadians due to the warmer weather and the strong real estate market currently. Canadians made up 19 percent of foreign investors in the United States in 2014 and that figure is only going up.

What then do you need to know to buy real estate in the U.S.? In this 3-part blog series, we take a deep dive into this process, examining ten essential aspects to prepare you for American home ownership.

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1. Foreign Ownership

While in many countries, non-citizens or foreigners are not allowed to buy any property, this rule does not apply when Canadians wish to buy property in the United States fortunately. However, there are rules that you will want to pay attention to and become familiar with in the area that you choose to own property in. This can range from federal to state and municipal laws and regulations about foreign ownership, any property restrictions or requirements, associated fees and taxes.

Currency Fluctuations

Pay attention to currency fluctuations as well. Buying across the border always bears some risk as fluctuating currency rates can affect mortgage costs, condominium fees, maintenance fees, how much rental income you can make and the ultimate value of your property if you choose to sell it at some point in the future.

Foreign Investment

Even though Canadians can acquire U.S. real estate, where you choose to buy, should involve in-depth research and knowledge of the area before you decide to buy. Do your due diligence such as finding out what the area is like, what services are available to foreigners, if there are already foreign investments in the area and if the local population is friendly and welcoming to newcomers.

Still Subject to Laws

Obviously, buying U.S. property does not entitle you to American citizenship. You would still be liable to laws that regulate how long you can stay on American soil as a foreigner.

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2. Real Estate Purpose

What is the purpose of your real estate purchase? Do you intend to live in it? Do you intend to rent it? If you intend to rent, you need to be sure that your rental arrangement complies with all local laws and regulations. Some communities do not allow rentals under six months or a year. Also, if you intend to rent, you will want to buy property in a high demand area where there are a lot of suitable potential tenants and you can earn a good rental income.

Once again, you will need to do your homework.  Working with a highly regarded Realtor with experience of the area(s) and with in-depth knowledge selling to foreigners is of utmost importance.  Talk to your local Realtor as they will assist you with a referral to a qualified agent in the U.S.

Foreign buyers contributed to $92.2 billion in U.S. home purchases for the last 12 months ending in March this year, according to the National Association of Realtors. International buyers have increasingly been buying residential real estate for rental purposes since 2010.

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3. Property Location

Where do you want your home to be located? Buyers should travel to the destination to gain in-depth knowledge of the area before buying so that you assess local services, amenities, community orientation, schools, churches, etc.

Popular States

The five states with the highest numbers of foreign buyers of residential real estate include Florida, California, Texas, Arizona and Washington. California’s climate is appealing to many, but its housing prices can be significantly steeper than other locations. Texas has increasing become a popular destination as it has a warm climate without humidity like California but lower real estate prices even in the popular metropolitan areas of Dallas or Austin. Of course, Florida is always a popular location with our “snowbirds”.

Transportation

In choosing a location for your property purchase, consider transportation. How will you get around? Is there safe local transportation? How far away is the property from the airport? This is important not only for you but if you choose to rent the property later to tenants.

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4. Home Selection

What kind of a home do you want? Will your home be suburban or urban? A survey by the National Association of Realtors (NAR) in 2018 discovered that almost fifty percent of all international buyers in the U.S. tend to buy properties in suburban areas with only twenty-five percent choosing urban areas. These decisions seem to suggest that the buyers are choosing residential properties that can serve as both vacation and investment purposes.

Intended Use

What type of property will you buy? Is it a single-family home or a unit within a multifamily building? Do you want to be located in a more rural area or one with access to a certain amenity or city? Do you want the latest amenities or technology? The answers to these questions and similar ones will help you determine what your preferences are. They will also help you make decisions about location, floor plan, size, amenities and other important lifestyle decisions. 

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5. Home Inspection

Before you make any home purchase abroad, you will want to make sure to get a professional inspection of the property for your own safety, to uncover any hidden issues and to just get an honest appraisal of the condition of the home. 72 percent of American homeowners said in a survey conducted by Harris Interactive that a home inspection helped them avoid possible problems. While a home inspection can cost roughly $300 to $500, the inspection can save you significantly on future home repairs down the road. You can find a certified inspector via the searchable database on the American Society of Home Inspectors website.

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Now let’s take a closer look at all the financial aspects of buying property in the U.S.

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6. Getting Insurance

When you own residential property in the United States, you are required to have homeowner’s insurance. You can expect to pay roughly $3.50 per $1,000 of your home’s value. For example, if your home is valued at $250,000 you should expect to pay an annual premium of approximately $875. Your premium is also affected by the location and age of your new property. In addition, high risk factors such as swimming pools, trampolines, and certain types of dogs can increase the annual premium.  Shop around before committing!

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7. Costs of Purchasing Your Home

This by far is the most important decision driving your real estate purchase at any given time. Do you have enough financial assets and resources to buy a home? For many Canadians, this is a second home purchase. Will you be able to keep this home for a while? If you find yourself in a situation where you have to sell quickly, you may be a disadvantage if the market is down or exchange rate is too low, resulting in a large loss.

One-Time Purchasing Costs

Buying a home incurs several one-time purchasing costs such as:- Purchase price of the home- Professional fees- Closing costs

When you buy a home, there are certain purchasing costs in addition to the purchase price of the house. These fees include professional fees such as fees paid out to real estate agents, attorneys, inspectors, appraisers and financial/tax professionals and closing costs that include sales and transfers taxes as well as title and notary services. If you financed the purchase, you may also have mortgage origination expenses.

Ongoing Costs

In addition to these fees, you will have ongoing costs when you buy American real estate. This includes:

• Mortgage payments
• Utilities
• Community fees
• Taxes
• Insurance
• Security
• Maintenance
• Travel

Mortgage payments are your largest ongoing expense if your property is financed.

Utilities can vary depending upon your location or the type of property and its condition. Community fees can include maintenance fees, management fees and related services. Taxes include local property taxes as well as Canadian taxes. 

You will also have to pay for homeowner’s insurance which is mandatory with minimum coverage levels in certain areas. Home security is extremely important so obtain quotes from local professional firms or ask your insurance broker for a recommendation. In terms of maintenance, how will the home’s exterior including the yard, swimming pool or other outdoor amenities be managed and taken care of? How will you handle repairs? You may want to hire the services of a property management firm.  Finally, be sure to include travel costs to and from Canada!

Costs to Sell or Inherit

If you inherited a property and/or are just looking to sell, you will want to understand what exit options you have and related expenses. Consider if the property will be subject to capital gains tax and how that is calculated. This varies greatly on who the inheritor is. When the property is sold, will you be able to transfer the payment out of the country without taxation? What tax implications will you face for repatriating and investing back in Canada? Can you avoid inheritance taxes if you move the property into an estate?  You need to discuss these issues with your accountant and an estate lawyer with experience in cross-border sales and repatriation.

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8. Financing Your Home Purchase via a Cash or a Loan

Buying a home in the United States as a Canadian is far easier than you would think! You don’t even need a social security card. You can buy any house you want when you pay with cash. When you buy in cash, you do not have to worry about financing. 

However, things get harder if you need financing from a financial institution or private lender. The requirements for obtaining a mortgage on a foreign vacation home are different from having a mortgage approved for your principal residence in Canada. If you are considering getting financing for your second home, you will need to find the right lender.

As a Canadian buyer, you will find it easier to work with a Canadian bank that operates in the United States. Canadian buyers can also look at funding from financial institutions with large brands such as the Royal Bank of Canada or TD American Bank. Financing a home can require some effort, so seeking out the advice and help of a real estate investment firm may be advisable.

To obtain an approved loan or conventional mortgage from a financial institution, you will face similar requirements that American citizens do such as a good credit score, proof of income, proof of legal residency, employment and more.  Speak to your banking representative in Canada and ask for assistance to guide you through this critical process.

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9. Taxation, Inheritance and Estate Planning

With affordable US housing prices and a growing Canadian economy, more and more Canadians are purchasing investment property in the US. This could be a second home, rental income or serve other purposes.

When a Canadian receives rental income from real property located in the U.S., the person has to pay a non-resident withholding tax of 30 percent of the gross rental income to the Internal Revenue Service (IRS). This 30 percent withholding tax cannot be reduced. If the income was connected to a business, then the non-resident can deduct expenses to run that business and be taxed on the net income at graduated rates. To do this, the individual has to complete the form W-8ECI which has to be submitted by the tenant to the IRS.

The Canadian would then file a U.S. tax return as a non-resident (form 1040NR). The return has to include a statement that an election has been made (where the expenses were incurred) and include details such as the address of the property, your percentage of ownership and description of improvements made. The election is made only once and is valid for as long as the taxpayer owns the property and has filed the 1040NR on time. 

To file this form, the taxpayer will also need to get a U.S. Individual Taxpayer Identification Number (ITIN) by completing a form W-7. A taxpayer also has to report rental income in the state where the property is located.

If you wish to sell U.S. real property, you would have to pay a fee of 10 to 15 percent withholding tax of the selling price due to the Foreign Investment in Real Property Tax Act or FIRPTA. You pay only 10 percent if the property is less than $1 million but over $300,000 in value and you intend to reside there. If the property is less than $300,000 in value, there is no withholding fee. You can also request a withholding certificate from the IRS on the basis that the expected U.S. tax liability will be less than 10 to 15 percent of the selling price. To do this, you will need to fill out Form 8288-B and send it to the IRS. Include a U.S. ITIN on the Form 8288-B. You will receive a withholding certificate within 90 days of submission.

Gain or loss on the sale has to be reported on a U.S. Non-Resident Income Tax Return (1040NR). You would pay a U.S. tax first and then you can claim this as a foreign tax credit against any Canadian or local tax on the sale.

You also face risks when you rent property to tenants such as being sued and liability issues. Thus, protecting the owner is important when you buy property abroad. Probate is another issue that arises when the property is owned by a parent who dies, and then the property passes on to children or beneficiaries upon death. Probate can cost as much as 3 percent of the estate in Florida. It is also a time-consuming process and can freeze up the estate. Appointing a guardian can help in managing the estate in the case of incapacity when a property is held in the names of two or more people and one person becomes incapacitated.

If a Canadian owner passes away, the property is assessed a U.S. Estate Tax of 35 percent if the Canadian owns more than $60,000 of U.S. Assets and has a worldwide net worth of over $5,000,000. The 35 percent U.S. Estate Tax is on the total value of all U.S. assets. These figures can change periodically so it is best to check the latest requirements.

One method that has been used to address all these concerns is to create a Cross Border Trust that helps you avoid the problems of probate and incapacity while providing creditor and divorce protection for your children. Be sure to get professional legal advice on these issues to make sure you set up your home property ownership correctly and manage it well.

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10. Assembling Your Team

Now that you know all the essentials of what you need, it is time to assemble your team.

Realtor

Your Realtor is your primary contact and may be able to help you find the remaining members of your team from insurance brokers to tax preparers, attorneys, property managers and home inspectors. When you choose your Realtor, look for someone who is local, knows the region and can give you up to date, real information in your first conversations. Choose a Realtor that you feel comfortable to work with to find new listings, follow up on homes you found and preview homes to save you time. You want to have a Realtor who is extremely knowledge dealing with the myriad of issues to be addressed with foreign buyers and who can support you throughout the sale – before, during and after. You will want to work with a Realtor who will schedule your appointments in an efficient way so that you get the most out of your time when you visit.

You can provide your Realtor with a Power of Attorney to close the deal for you. In addition to the fees you expect, you may also incur some additional fees that you do not expect such as additional inspections, appraisals, lender fees, lender required pre-paid property tax, insurance and buyer’s title insurance policy costs. These costs can add up to as much as 4-6 percent of the sale price.

Mortgage Broker

If you are financing your home, you will also need the services of a mortgage broker. Choose someone knowledgeable about Canadian taxes and legal matters ideally. Perhaps your Realtor can recommend a knowledgeable broker.

Tax Preparer

The tax preparer helps you figure out how to monetize your home, your tax deductions and other tax details. You can figure this out using TurboTax but for more specialized knowledge especially on American tax regulations and clauses, you can benefit from working with a professional. The fees range from $600-$800 a year. If the tax preparer also helps you prepare your taxes, there will be more fees.

Attorney

Real estate is governed by both state laws and rules of the home owners’ association. Each state differs so feel free to ask. Legal counsel can be expensive so do your due diligence before you hire your lawyer. With the help of your lawyer, you will ensure that your purchase is protected against unexpected problems that were hidden from your initial view and other issues. This will help you feel confident at closing time.

Inspector

The inspector will help you find any flaws in the home that require repair and help you get to know the real condition of the home.

Summary

Build a good team that will protect you from making risky investments and minimize stress by delegating and managing details for you. This will ensure that you will finalize your deal faster and with less troubles. If you assemble the right team, you will be able to close on your purchase smoothly and you can enjoy your second home in as little as one month’s time.

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Links:

American Society of Home Inspectors 
www.homeinspector.org/

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