Buying a Condo in Florida?

Canada has some of the harshest winters in the world, so it isn’t surprising most of us love the opportunity to retreat to warmer destinations. Every year, Florida, Arizona, and other warmer U.S Sunbelt destinations play host to a sizeable population of Canadian "snowbirds," people who flock south when the mercury drops precipitously up north. According to a Florida Department of Tourism report, 3.6 million Canadians visited the sunshine state in 2019 before the coronavirus pandemic broke out. 

For Canadians, the temptation to buy a U.S. property has never been greater both as a vacation home and as a strategy to help diversify their investment portfolio. Between April 2020 and March 2021, Canadians purchased US$4.2 billion worth of U.S. properties, reports the National Association of Realtors. While the number is considerably lower than US$9.5 billion the year before, it shows that Canadians continued to invest in U.S. real estate, even amid widespread travel restrictions. In fact, Canadians have been the second biggest group of foreign buyers of U.S. residential property, behind the Chinese, for several years in a row. Florida is the leading destination for Canadian buyers. Not surprisingly, the other top states are also warm: Arizona, California, Texas and Georgia. 

However, if you want to join the group of investors in international real estate, you should consider professional guidance for a thorough understanding of planning implications. Here are six key factors that can help a prospective U.S. vacation property buyer determine the financial consequences of ownership, and ensure an informed and well-considered decision.

1. Financing the Property

Many affluent Canadians choose to buy U.S. properties outright. While mortgage financing is offered by banks on both sides of the border, cash transactions expedite the buying process by lower closing costs. Plus, in many cases, the buyer might qualify for a price discount. These all-cash, no-mortgage transactions, however, require professional advice to help clients navigate stringent anti-money laundering laws and avoid any legal surprises.

2. Additional Costs

Canadians are required to absorb some additional costs to stay compliant with local by-laws. For instance, homeowners in the U.S. may need to secure additional protection through hazard insurance and properties along the storm tracks may attract higher insurance premiums.

Many Canadians who own vacation homes in the U.S. rent out part or all of their homes to cover property costs or to offset the cost of living in the U.S. This involves considerable planning, familiarizing oneself with local rental rules, lease agreements, and/or engaging property management or caretakers, each of which could entail additional costs.

The better the preparation, the smoother the transition to a new lifestyle, and the richer the local experience.

3. Property Tax Implications

International property taxes tend to be higher for foreign buyers and must be calculated carefully. In the U.S., property taxes can jump significantly and are not revised when property value falls. The U.S. laws impose a 30% withholding tax on gross rental income if a portion of your property is used for rental purposes. These taxes are collected by the local municipalities and counties of the U.S. states, and rates vary from jurisdiction to jurisdiction, as do methods of assessing the property value.

There are other events that may trigger taxes on your vacation property. For instance, if you sell or gift the property during your lifetime or if you own real estate upon your death, tax could also be payable in such an event.

4. Cross-border Tax Planning

A carefully tailored estate plan will help mitigate the punitive implications of cross-border taxation and prevent erosion of wealth and diversification benefits. Canadians who spend four months a year in the U.S. will be considered residents and may be subject to U.S. tax on their worldwide earnings. Here’s a comprehensive guide to determining your U.S. residency under the substantial presence test.

There are also cross-border filing obligations when Canadians sell their U.S. properties. An individualized cross-border estate plan can effectively lighten the tax burden and ensure a stress-free vacation.

5. Currency Valuation

Currency moves aren’t inherently disadvantageous. If timed well, these fluctuations can realize significant savings in international real estate transactions. A stronger loonie can boost exchange advantage for a Canadian buyer by driving down the cost of owning a foreign property.

When purchasing a snowbird property south of the border, Canadian investors should put care and thought into planning. Talk to your investment advisors who can provide customized financial advice on structuring the purchase and paying for a U.S. vacation home.

6. Health Insurance

Canadians who wish to spend considerable time at their vacation property in the U.S. need to purchase out-of-country medical insurance from a private insurer or a major bank. While it’s an important consideration at the best of times, the COVID-19 crisis has underscored the importance of acquiring a solid health coverage to meet financial challenges of any health issues arising during your stay in the U.S.

For Canadians, health insurance policies that cover COVID-19 can be expensive. Some policies may have onerous conditions and strict limits on how much they will pay. It’s advisable to seek expert guidance and ask your insurer specifically as to the kind of coverage is offered for COVID-19-related illness and treatment. Some health policies may require an additional rider specific to COVID-19-related costs. There could even be additional coverage terms, limits, and restrictions based on your vaccination status.