Real Estate investing in Canada versus the
United States
by Dave Peniuk
 Many Canadians are dreaming of heading south
for the winter, but not just to beat the cold. They have
real estate
investing on their minds. Our strong dollar combined
with a collapsing housing market in the U.S. spells
opportunity for many. But Canada and the U.S.A are not the
same country, and as much as we have in common we have
differences. Any Canadian investor
considering putting money in the U.S. should have a
basic understanding of some key differences between buying
real estate in Canada versus buying real estate in the
U.S. So, before you start putting your loonies in Florida
or Texas, read on.
Tax Systems:
Talk to an accountant that is experienced with American real
estate investment as the countries differ considerably in terms
of taxation of investment properties.
In the U.S.
- 1031 Exchanges allow the capital gains from the sale of
an investment property to be deferred and rolled into a
purchase of a similar type of property if it's bought
within 180 days. This can be done many times allowing
capital gains to be deferred until the end asset is finally
disposed of and not replaced;
- If capital gains are realized (property is sold and
cash is received), the seller is taxed at 15% of the total
net gain (as long as the property was owned for more than 1
year, if less than, the rate is much higher);
- Property taxes tend to be similar to those in Canada,
however, if you are a Canadian and own a property in a
Southern state like Florida or California, you may have
much higher "non-resident" property taxes than either the
locals or if you invest in other U.S. States;
- Similar to Canadian tax laws, you will not be taxed on
your primary residence, however, in the U.S., you can
write-off the interest charged on your home.
Compare this to Canada
- Sell your investment property in Canada and you'll pay
capital gains tax on 50% of the net gain. Canada does not
yet have the option of deferring the gain through an
exchange. The "gain" or "loss" gets added to your income
and your are taxed at the applicable rate (which could be
much higher than the standard 15% rate in the U.S.);
- Similar to in the U.S., expenses associated with
holding an investment property can be written off against
your taxable income. See two previous articles for tax time
tips: Part
1 and Part
2.
Before you send your loonie south this winter:
- Determine if there are "non-resident" property taxes
applicable in the city/state you are considering;
- If you already own in the States and sell the property
(and don't buy another there to use the 1031 Exchange
strategy) you'll be required to pay U.S. taxes on the sale.
You pay the U.S. first, but still have to file the tax
return in Canada (showing the taxes paid in the States).
Thus, you'll only pay once (you get a tax credit applied to
your Canada taxes), but you have to file 2 returns
(February/March 2008 Money
Sense has a great article on this issue);
- Rental income requires two filings for taxes as well.
You must claim the income (and expenses) in both countries,
pay the applicable taxes, and get a credit for your
Canadian taxes.
Lending differences between Canada and the U.S.:
The "credit crunch" or "subprime market meltdown" has had a
dramatic impact on the U.S. lending environment, and has
trickled over the border to Canada. Because of the economic
crisis, lender guidelines and policies have changed
dramatically in both countries. In the U.S., there were many
mortgages given to just about any candidate. The phrase "ninja"
loan was coined in the U.S. The acronym standing for "no
income, no job, no assets". Many individuals were given
mortgages beyond their means. When the first large phase of ARM
(adjustable rate mortgages) began to raise their rates,
foreclosures began popping up all across the nation. Canadians
need not fear the same crash here thanks to very different
lending environments.
In the U.S.
- Hundreds of banks across the country with hundreds of
differences in lending policies and guidelines;
- Licensing varies across each state for who can be a
mortgage broker. In some states no testing or licensing is
required at all!
- Bank regulation is controlled at the state and federal
level, again possibly leading to less strict lending
criteria from one bank or lender to another.
And in Canada
- One federally-regulated Bank Act that controls what
banks can and cannot do across Canada;
- Only 5 major banks in Canada that control a large
majority of all banking divisions;
- All of the Big 5 Banks in Canada are able to lend funds
for mortgages, but they have also acquired (and oversee)
many of the licensed trust and brokerage companies (which
lend money as well);
- Mortgage brokers are provincially regulated in Canada,
but the majority of provinces require extensive training,
and the successful completion of a licensing test.
Economic Conditions in Canada and the U.S.:
The Canadian economy continues to enjoy good economic times
with historically low unemployment rates, increased wages, and
housing appreciation. At the same time, a recession has been
lurking in the U.S. Many areas of the U.S. are experiencing
depreciating houses, high unemployment rates, and deteriorating
consumer confidence.
There could be some real bargains to be found in the U.S. as
foreclosures pile up, property/houses depreciate (well into
double digits in some States - Florida, Michigan, California),
and our Canadian dollar continues to sit around par with the
greenback. But before you take the plunge, do your research.
Most economists still believe we are in the midst of the
subprime fiasco. They forecast continued depreciation across
the nation (obviously much worse in some areas than others) for
the better part of two years. So, unless you really know an
area is going to get better soon, I personally, would wait and
see what the summer and early 2009 has to bring. The election,
the war, federal policies to "bail-out" millions of
credit-burdened borrowers, and the worst part of the subprime
scenario which is predicted to hit in the fall of 2008, are all
factors that will impact investment in the coming year, and
it's a gamble to buy without knowing what will happen. But,
with the strong dollar, it's a good time to head south and
start looking for that dream home in Florida, isn't it?
Some final thoughts (in this article anyways) on
investing in the U.S. real estate market. If you are intent on
purchasing in the U.S. and are a Canadian citizen residing in
Canada, the following three ways may help you obtain
financing:
- Take out a mortgage in the U.S. through a U.S. based
bank owned by a Canadian one such as RBC Centura or Bank of
Montreal's Harris Bank;
- Purchase using all cash so you don't have to deal with
cross border financing issues (e.g., pull equity out of
your home or other Canadian properties or ask your rich
aunt for money!) to buy down south; and
- Create a corporation in the U.S. with assets (a holding
company will not work as it needs to have equity or be
generating revenue) which can obtain the mortgage from a
U.S. lender.
Published on March 1,
2008
-------------------------------------------------------------------------
Discover the
hard-won secrets to building a real estate portfolio
worth seven figures in Canada - Get the Rev N You
with Real Estate Starter Tips Guide
free when you sign up for Rev N You with
Real Estate's e-zine. Get started with real estate
investing
today.
We respect your privacy and WILL
NEVER SELL OR GIVE AWAY your name and e-mail address to
ANYONE!
| 
