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Winnipeg Free Press - PRINT EDITION
Look before you leap at cheap U.S. homes
Prospective buyer must examine tax issues
If I offered you a beautiful three-bedroom house in an attractive neighbourhood in your city for $100,000, would that grab your attention?
Now, what if I said the house cost $300,000 to build just four years ago, is in perfect condition and the landscaping is complete?
One of two reactions is likely: Either you would say, "Where do I sign?" or demand, "What's wrong with it?"
Both reactions are a little premature because, of course, I am talking here about houses in certain areas of the United States, where the financial crisis and the resulting explosion of the real estate bubble have decimated prices.
This column is not providing investment advice or recommendations to buy -- or not buy -- American real estate. Instead, I am recommending that you move carefully and deliberately with such an important decision.
Before buying, be sure you understand all the ramifications of ownership, and try your best to determine what your intentions and goals are for such real estate, and how it fits into your own personal long-term plans.
In other words, don't just buy because it's 50 per cent off. Make sure it fits into your closet.
What's not to like about U.S. house prices? With the loonie near par -- giving you 28 per cent more purchasing power than in March 2009, median home prices in Phoenix coming in around $120,000 in September, but prices apparently firming up and new home sales the highest in four years, a lot of factors that scream "bargain!" are in place.
Before you get serious about buying, though, decide on your purpose. Is this a speculative investment, where you are counting on a price rebound in a couple of years to make a quick buck? If so, make sure you can afford to hold it longer, if the recovery is slower than anticipated.
Will you be renting it out? On a long-term lease to a local resident, or to snowbirds? Using a management company or renting yourself? Look realistically at the strength of the rental market first, and the time it will take to be a landlord.
Christa Walkden is a CPA and U.S. tax expert with Meyers Norris Penny in Winnipeg. She and I did a presentation this week on U.S. tax issues, and she points out renting out an American property requires you to file a U.S. tax return each year, get a U.S. Taxpayer Identification Number, and decide whether you will elect to pay U.S. taxes on the net income, or go with the automatic 30 per cent U.S. withholding tax on rent paid to foreigners.
If the property is strictly for personal use as a vacation property, that's less complicated, but you will still be required to fulfil all of those U.S. tax-filing requirements when you sell, and pay the potentially higher U.S. tax rates on any capital gain. Estate taxes may also be an issue.
Walkden provided a matrix showing eight different ways of actually owning a property, and the effect of each on income taxes, estate taxes, control over the property, liability protection and complexity of the transaction. It's quite fascinating, and something that should be examined carefully before buying.
Ownership methods include individual direct ownership, joint ownership, tenants-in-common, a Canadian trust, corporation or partnership, or U.S. corporation, partnership or limited liability company (LLC). Each has its advantages and disadvantages. The main determining factors may be the use to which you will put the property, and its value, especially in the context of your worldwide assets.
As Ed Sullivan used to say, "Kids, do not try this at home," without professional supervision. In the meantime, though, you can do further reading at my blog www.davidchristianson.com, or by purchasing The Canadian in America, by Brian D. Wruk and Terry F. Ritchie, or Owning U.S. Property -- the Canadian Way by David A. Altro.
-- -- --
Good news -- the future looks bright! I spoke last night to 400 students from the Asper School of Business, at the 44th annual Commerce Business Banquet. That incredibly impressive group of young people gave me a lot of confidence about the future of the business community.
David Christianson is a fee-for-service financial planner and portfolio manager at Wellington West Total Wealth Management Inc. He can be reached at
dchristianson@wellwest.ca
Republished from the Winnipeg Free Press print edition November 19, 2010 B12
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