US Real Estate for Canadian Snowbirds in the Time of COVID-19

Many Canadian snowbirds are swimming in questions right now about what the future holds for their cross border lifestyles. There are the fears of more travel restrictions, an unpredictable US real estate market, and exchange rate volatility. One question that has been resurfacing in our practice, in the wake of COVID-19, has been whether estate planning documents such as wills and powers of attorney prepared in Canada are recognized in the United States. At Levy Salis LLP, we can review your estate planning documents and, if necessary, draft new ones to make certain you are covered, wherever you are.

Canadians who already own US real estate are wondering too if now may be the time to sell before COVID-19 causes a drop in property values. Perhaps you purchased your vacation home back when the Canadian dollar was at par with the US dollar, and have realized a nice appreciation on your vacation home’s value. Is it worth incurring all the closing costs and taxes on a sale? Depending on the county in which you are selling or buying in, you may be responsible for the costs of title insurance too. Moreover, Canadians who sell US real estate are subject to a mandatory withholding in the sale and to taxation on the sale in both the United States and Canada. Those are all calculations that are handy to have at the ready when weighing this important decision.

In the inverse, some Canadians are wondering if is the time to rent out their US real estate. Renting out US real estate raises issues such as liability and exposure to US and Canadian tax. Liability insurance in the United States is often insufficient to cover claims by tenants against property owners. This makes ownership structures which limit a property owner’s liability a necessity. These structures include corporations, limited liability companies (LLCs) and various types of partnerships (limited partnerships, limited liability partnerships and limited liability limited partnerships). However, many structures which work for Americans such as LLCs are problematic for Canadians because income and capital gains earned through such structures can lead to double taxation in Canada.

Canadians who earn rental income from US real estate are subject to both US and Canadian taxation and tax reporting obligations. These obligations go beyond simply declaring the income. They include concepts such as depreciation, which works very differently in the United States when compared to Canada, as well as minutiae such as the required forms for declaring the ownership vehicle through which a US rental property is held. Navigating the tax compliance rules in the United States and Canada to ensure compliance requires the right professionals.

For Canadians who seek financing to purchase US real estate or want to refinance a US vacation home to extract value from the property for reinvestment, doing so through US banks is a more complex and lengthy process than through Canadian banks. Moreover, many US banks do not lend to Canadians because they do not recognize Canadian credit history. Fortunately, a number of Canadian banks have US subsidiary banks which have a great track record in lending to Canadians. Unlike most US banks, these US subsidiary banks offer a greater loan-to-value ratio (between 60% and 80% of the property), issue loans on the basis of a borrower’s Canadian credit history and are better suited to guiding Canadians through the complexities of US mortgage lending.

Timing the markets is a notoriously difficult task to do well, especially given the unpredictability that the COVID-19 brings, and the Internet is full of fun examples (such as the market timing game) of this in action. This truth is especially hard-hitting for US real estate sales, where closings routinely take place no sooner than 30-45 days after a contract is signed. But having a plan in place for all the contingencies gives you an edge when the time does come for you to act.

Operating out of offices in both Canada and the United States, our team of experienced legal professionals can guide you through the complexities of buying, selling and renting out US real estate as well financing or refinancing US real estate. We invite you to reach out to us at Levy Salis LLP for a consultation. We love helping build roadmaps for our clients. Now–more than ever in recent memory–is this crucial to having peace of mind about your cross-border lifestyle. We look forward to working with you to identify your goals and explore all the options available.