Arizona bound: Canadians snapping up homes, but they need to be careful

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Jim Ballance had always dreamed about owning a place down south when he retired, but the price tags had always been too high.

"We had been going down there for about 20 years, and all those properties kept going up and up," says the 61-year-old retiree.

Prices increased by about 20 per cent a year until about 2006, when Ballance says he noticed they began to level off.

With the Canadian dollar at par with the U.S. greenback, he decided to strike while the conditions were right, buying a 2,400-square-foot condo in Palm Desert, Calif.

Since then, of course, the U.S. real estate market has only become more buyer-friendly, with prices in Arizona, California, Nevada and Florida dropping as much as 60 per cent from their highs more than five years ago.

"People will say to me 'I bet you wish you bought now,' " Ballance says. "But I always say 'If I bought now, that would be five years I didn't enjoy being down there.' "

These days, Ballance is likely to find he has plenty of Canadian company in the desert. He is among a growing number of Canadians who now own property in the United States.

In fact, Canadians are now the leading buyers of U.S. real estate, says David Altro, a lawyer with Altro & Associates.

"Prices are way down and the Canadian dollar is up, which creates the perfect storm," says Altro, author of Owning U.S. Property -- the Canadian Way.

And Winnipeggers haven't been sitting on the sidelines during this real estate buying bonanza. Former Winnipeg police officer-turned Arizona real estate guru Diane Olson says many of her clients are Winnipeggers who want to buy a second home in the Phoenix area for less than they could buy a home here in the city.

In many instances new, multi-bedroom homes -- some even with pools -- in good neighbourhoods are selling for under $200,000.

"It seems the average buyer is around 50 years old," says the Realtor, whose firm goes by the title Diane Olson Team.

"Some are renting them out and not using them personally, yet, and others are using them some of the time and letting friends and family use them other times."

Olson says prices in the Phoenix area are as low as they've been in the last decade, but the market is showing signs it may start going up again.

"I don't have a crystal ball, but for the last three months the really lower-valued... properties have been going up slightly," she says about homes with a $100,000 price tag.

"Lately, I've seen multiple offers on lower-priced homes, and I've seen them going for over the asking price, which may be telling or not."

While market conditions may be ripe for the buying, would-be buyers need to get legal, financial and tax advice from professionals with cross-border experience before making the purchase, Altro says.

"I say take your time, do the due diligence and don't panic because it (the market) certainly isn't going up significantly in the short term."

Altro says one of the main concerns for Canadian buyers is the potential tax implications associated with owning U.S. property.

The U.S. estate tax -- often referred to as the 'death tax' -- is normally the largest tax liability.

This tax applies to the U.S. assets of deceased individuals with worldwide assets exceeding $5 million.

Individuals with total assets less than $5 million are exempt from the tax that can run as high as 35 per cent of U.S. assets, including real estate.

Given many Canadians do not have $5 million in assets, the estate tax might not seem like much of a concern, but Altro says the taxation rules are set to change in two years, affecting many Canadians with U.S. assets.

Starting in 2013, the estate tax exemption will be lowered to less than $1 million in worldwide assets, and the highest tax rate will be bumped up to 55 per cent.

Altro says Canadians with U.S. real estate do have a few options to structure ownership of U.S. property in a tax-efficient manner to reduce or eliminate the estate tax and other related costs like probate fees.

The most common strategy is to hold the property in a cross-border trust.

He says this specialized trust should be set up before purchasing property so it's the trust that legally buys the asset and owns it, but it's the client who controls the trust.

This offers many advantages, but most importantly, assets held within the trust are not subject to the estate tax when the client dies.

"Inside the trust it can state that when you die, control goes to your spouse or kids."

Altro says U.S. property held within the trust is also subject to more favourable capital gains taxation when the property is sold. Instead of paying as much as 35 per cent on the property's increase in value, the capital gains tax on assets in a cross-border trust is 15 per cent.

Tax considerations, however, are just one of many for Canadians to mull over before buying U.S. real estate. They also have to look at financing.

RBC branch manager in Winnipeg Marcel Tetrault says many Canadians use a home equity line of credit, borrowing against their home here -- currently at all-time highs in value -- to purchase the property in the United States with cash.

"Or they're being referred to a cross-border mortgage specialist," he says. RBC and a few other Canadian financial institutions also have U.S. branches that can provide more traditional mortgage financing for purchases in Phoenix or other Sunbelt states.

Altro says he often recommends clients use a Canadian financial institution or one of its U.S. subsidiaries, because U.S.-based financial institutions have dramatically tightened up their lending practices since the 2008 meltdown.

Olson says buyers should also familiarize themselves with the different types of home sales in the United States. She says about a third of sales in the Phoenix area are short sales. Basically, the homeowner is selling the home for less than what is owed on a mortgage to a lender.

"If they meet all the criteria, the bank will let them, but it doesn't pre-approve it in advance," she says.

"A short sale should really be called a long sale because it can take up to six months, and it still may never close."

She says foreclosures are often more straightforward and usually take less time to close -- about two weeks for cash buyers.

But they, too, can be problematic, Altro says.

"What you have to worry about with foreclosures is the condition of the property, because someone has lost their house," he says. "They may have ripped out the appliances."

Still, many homes on the market are neither foreclosures nor short sales. The homes are on the market because the owners need to sell for whatever reason, and they're stuck listing at a price the market will bear.

"That's why you don't have to get a short sale or foreclosure," he says. "You can buy from a regular seller and get that similar low price."

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Becoming a landlord

Arizona Realtor Diane Olson says many Canadians are buying property for investment purposes, hoping to buy low and sell high after a number of years. In the meantime, they plan to rent out the property. She says conditions for owners looking to rent out their property are very favourable at the moment -- at least in Phoenix. Many Americans with steady jobs are renting homes for their families to rebuild their credit after selling their homes for a loss or walking away from the mortgage.

Enjoy your time down south, just don't stay too long. Snowbirds, particularly those who own vacation property in the United States, have to be mindful of how long they spend across the border. A Canadian may have to file with the IRS on their U.S. asset regardless of how long they stay in the U.S. But if they stay too long, the IRS may deem them as 'resident aliens' and they may be subject to U.S. taxation on their worldwide assets. The IRS uses a measurement called the 'substantial presence test' to determine if a visitor is a resident alien. To become a resident for tax purposes, you must have been in the United States for at least 31 days of the current year and 183 days over the last three years, including the current year. All days spent in the U.S. in the current year are counted toward the test, but only a third of the days spent in the U.S. in the previous year and one-sixth of the days in the year before that one are counted in the total. Winnipegger Jim Ballance, who owns a vacation property in the U.S., says he has an easier way to be certain he stays under the limit. He spends no longer than four months each year -- or about 120 days -- in the U.S.

-- source: Government of Canada pamphlet Retiring Abroad: Seeing the Sunsets

Republished from the Winnipeg Free Press print edition September 24, 2011 B12