Portfolio manager runs the rule over mortgage issues, state rules, and tax implications
With people learning in the pandemic that they can work from home from anywhere, more are buying second properties in the warmer United States climates. That’s raising a lot of cross-border financial issues that advisors need to be aware of in order to provide their clients with the best advice.
“What we’re seeing is people buying at a slightly younger age, like pre-retirement, because if they can work remotely, then why not spend two months working in the U.S.?” Darren Coleman, Senior Vice-President and Portfolio Manager with Coleman Wealth of Raymond James, told Wealth Professional. “The assumption is people see this as a ‘just-about-to-retire’ kind of decision.”
Doing that, however, raises several issues. The first is how they will pay for it because Coleman said American banks don’t talk to Canadian banks well. Clients’ credit bureau reports also don’t cross the border.
“So, let’s say a client decides to buy a property in Naples, Florida,” he said. “It’s very challenging to walk into a local bank branch and say, ‘I’d like to open an account and get a mortgage for a million dollars’. That’s going to be an interesting conversation because, to them, you don’t exist.”
Coleman suggested people get their financing organized in Canada before property shopping in the U.S. because the easiest way to buy U.S. property is take out a line of credit on your Canadian home.
“It is possible to get a mortgage on the property in the U.S., but that’s usually a more complicated dialogue for most people. The easiest thing is if they have a home in Canada with a lot of equity in it – or it’s paid-off completely,” he said. “If they place a line of credit on it, that’s fairly straightforward to do with their local financial institution because they probably already have a relationship there.”
That means the payments can also be in Canadian dollars, though he said the clients should also have a local U.S. bank account to pay property taxes and utility bills, and most Canadian banks have a mechanism to support that.
Clients should also get strong advice from a Canadian attorney who handles U.S. real estate transactions – not an American attorney unfamiliar with Canadian circumstances – before they buy so they can decide how to own the property. They can own it in their name, jointly with a spouse or partner, in a trust, or as a corporation. All of those all have pros and cons. One concern with joint spousal ownership is what happens when one spouse loses capacity. Each state has different rules.
Clients also need to consider whether they’re planning to rent out the property, such as for an Airbnb, or just use it for personal use. Coleman warned Canadians not to follow a common American route – often recommended by American lawyers who don’t understand Canadian law – which is to own the property as a limited liability corporation. That’s great for Americans, but toxic for Canadians because it usually results in double taxation. Earning rental income means they must file a U.S. tax return to report that income.
Finally, clients who want to buy U.S. property how they’re going to manage and maintain it while in Canada. While they can, for instance, install technology so they can see if anyone is breaking into their home, who will they call if they see that? Or, if there’s a hurricane., who will board up the house up when they’re in Canada?
“I think another thing that can surprise people is the cost of insurance and what is, and is not, covered,” added Coleman, noting that’s particularly true for hurricanes.
Advisors should also ensure clients check what kind of health insurance and health care they can get, particularly if they have pre-existing conditions, since U.S. health care can be “wildly expensive”.
Clients should also check how long they can stay in the U.S. before being considered U.S. residents for tax purposes, which could impact their tax filing.
“Clients should also test drive the area before they buy in it. Go on vocation, stay for a few days or weeks, and make sure you’re comfortable being there,” he said, adding they should try out the local activities they might like to do, like golfing, to see how much they want to do. “Go to the local movie theatre. Go to the local drug store. Get to know it, and not just the local mall. You’re going to live there, so test drive living there. Make sure it is what you want. Try out three potential locations. Take a couple of years and experiment with it and see what you like. And check if there are a network of people around who are going to be part of your life. Don’t just assume you’ll spend time with the people you spend time with at home. Do your due diligence.”
