Investing in U.S. Real Estate: The Good, The Bad and The Very Very Ugly

All real estate investors know that your profit is made at the time of purchase and NOT at the time of sale. In other words, it’s the price you pay that determines whether:

1. You are able to manage the property while you own it; and

2. Will determine your profits when you sell it.

Property prices in some parts of the United States have fallen more (as a percentage) than during the great depression. So, there are great deals to be had – or are there? Let’s analyze this in terms of: The Good, The Bad and The Ugly.

The Good

Prices in some areas (Florida, Arizona, etc.) have fallen tremendously. This fact coupled with a huge increase in Canadian home prices, make it seem like U.S. prices are low. Add to that the fact that the Canadian dollar is close to a historic high, and it looks like they are worth considering. There is no shortage of companies promoting U.S. real estate and their services. Should you jump on the bandwagon? Is it time to buy U.S. real estate?

The Bad

Expenses: Like any property, there will be expenses and you will have more trouble managing it. Obviously you will need good property management. (That is not an ad, we do no property management in the U.S.) Make sure that you took a good hard look at all the costs of owing. It may not be as appealing as you think.

Financing: As you may know, it may  not be easy for Canadians to finance properties in the U.S. (But here is a contrary view.)The best deals (and this is the only way it could be worth it) are for “cash deals”. Once you pay cash, you lose the opportunity to take advantage of the wonderful principle of leverage. You then need to compare the investment to investing in stocks that pay a dividend. Remember that a dividend gives you clear, predictable, “hassle free”, income. Plus (with the right stock) you will also get a capital gain (if you want to sell). Just a consideration, but do consider this.

Appreciation:

There is no way to know how long it will take for the U.S. real estate market to turn around. A lot of energy may go into managing the property along the way.

The Ugly – And I Mean Really Ugly:

Investing in U.S. real estate will be your port of entry into the U.S. tax system. Here are the hard realities. You will have to file U.S. tax returns while you own the property. You will have to file U.S. tax returns when you sell the property. If you own the property on your death, the value of the property will be subject to U.S. estate taxes. The IRS has launched a crackdown on Canadians, under the leadership of the Obama administration (“Change we can believe in”). The U.S. campaign to catch tax cheats is snaring Canadians (check this out you wont’ believe it). What does this mean for Canadian citizens/residents who are not residents of the U.S? What does it mean for U.S. citizens who are resident of Canada? If you are considering becoming a U.S resident, what this might mean for you? Let’s consider these questions one at at time.

1. Canadian citizen/residents (who are not also U.S. citizens) who are residents of Canada

You need to get specialized tax advice. As a general principle you will have to file U.S. tax returns when you own the property, when you sell the property and if you die with the property (U.S. estate tax). Furthermore, in certain circumstances, a percentage of the rent you receive must be sent directly to the IRS. Here is a more concise and elaborate discussion of this.

2. U.S. Citizens Who Are Resident Of Canada

U.S. citizens are taxed on their worldwide income. They must file tax returns every year. Furthermore, they are required to file information returns listing their foreign bank accounts and foreign (from the perspective of the U.S.) assets. The U.S. is currently launching an unprecedented attack on U.S. citizens and U.S./Canada dual citizens in Canada. Many U.S. citizens fear that their life savings may be at risk because they did not file reports of bank accounts that they use in Canada and RRSPs that you use for retirement savings. But, if you are a U.S. citizen, you already have to file U.S. taxes. So, maybe it is less risky for you to buy U.S. real estate. The IRS crackdown on U.S. citizens in Canada is an amazing story and should make Canadians wary of moving to or making investments in the U.S. If you are a U.S. citizen, you might be interested in the following courtesy of HR Block.

3. Canadians Who Are Thinking Of Moving To The U.S.

You should get good legal advice before doing this. Apparently the U.S. is considering offering Canadians who are willing to buy a U.S. property worth at least $500,000 and live 240 days a year in the U.S. a visa. Don’t do this! This is a tax trap. Once you live in the U.S. for more than a set number of days per year (and 240 exceeds this) you are trapped in the U.S. tax system. Furthermore, if maintain bank accounts and property outside the United States (which you obviously well) you will be required to detail all of this to the IRS. Failure to do so, will subject you to fines (and if they decide the failure was deliberate) the possibility of a jail sentences. Yes, you heard right. This is the law of FBAR (Foreign Bank Account Report). So, you should be very careful before considering a move to the U.S. Further information about bill to encourage foreigners to buy U.S. homes is here. More is here.

Conclusion:

Do your homework. If it appears to be too good to be true, it probably is. The only things that are certain are “Death and taxes”. You can’t control your death, but you should consider the tax implications of the IRS and Canadians.

 

 

 

3 thoughts on “Investing in U.S. Real Estate: The Good, The Bad and The Very Very Ugly

  1. Chautauqua Lake Real Estate

    I’ve hard some down right crappy tenants since I began investing real estate, mind you I’ve had some good ones too, but the ones I remember most are the incessant whiners.. I can’t seem to shake it.. I’ve told my wife any more real estate investments will be in bare land and not residential real estate.. Does anyone else agree? What has been your worse tenant story and why?

  2. Marina Smith

    Well, I think that it’s not a bad time to invest in the US real estate. But because of unstable economy interest rates on mortgages change all the time, they drop, then increase and then drop again. There were times when buying real estate was very expensive, people even used financial options for borrowing money to make payments on their mortgages. But I would say that basically, American housing market is in a good condition today. In some areas it’s possible to buy relatively cheap property. The most important is to think the way you will manage this property. I think that buying property in the US can be considered as a good investing but you should pay attention to the details.

  3. admin Post author

    Yes, the devil is always in the details. The details include the potential tax issues, filing requirements and having to deal with the IRS. You should give great consideration to this before getting involved in the US real estate market.

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