To Sell or to Hold, is the sun setting on sunshine state ownership?

There’s no doubt about Canadians’ love affair with the Sunbelt states. For years, snowbirds have flocked to markets like Florida, Arizona, and California to secure their own slice of paradise during the harsh Canadian winter months.

The numbers back this trend as well. Canadians are the largest group of foreign buyers in the U.S., spending a remarkable $5.9 billion between April 2023 and March 2024 alone. Even more striking is that Canadians account for 13% of all foreign real estate purchases in Florida, these figures according to a survey by the National Association of Realtors (NAR). It’s clear that Canadians are heavily invested in the U.S. market, even more so in Florida’s real estate.

In recent years however, the rising costs of purchasing and maintaining these properties (condo fees, special assessments, and insurance premiums) combined with a weak Canadian dollar, have led some to consider selling as a more viable option. Insurance premiums have surged due to increasingly severe hurricanes, with some insurers refusing coverage in certain areas, making the costs unaffordable for many property owners. Additionally, following the tragic collapse of a condo building in Surfside, Florida in 2021, many condo buildings have implemented steep maintenance fees to prevent similar disasters from occurring, further driving up the financial burden on owners. That said, is selling truly the best path forward?

The following article will discuss the various issues to tackle when selling your U.S. vacation property as well as provide you with a checklist of what needs to be done in order to satisfy your obligations on both sides of the border. And maybe……… provide an alternative to selling.

If you’re a Canadian considering selling U.S. real estate, here’s a list of 9 key factors to keep in mind.

1. Title Searches

When Florida real estate is sold, it is common for the seller to conduct a title search and lien searches on the property. This ensures that there are no ownership issues for the buyer and that the property can be purchased with a free and clear title.

2. Title Insurance

When purchasing property in Florida, it’s standard practice to obtain title insurance, which protects the new owner from any future claims against the property’s title. This policy ensures that any hidden defects in the title being transferred, such as unpaid liens for example, are resolved, providing peace of mind that the buyer will have clear ownership rights. Title insurance safeguards against financial loss from these issues, offering an added layer of security in real estate transactions. While title insurance is typically paid for by the buyer, this can vary depending on the county where the property is located. The crucial point is to properly select a title company that will make sure to properly remedy these defects in the title so the buyer will not have to deal with such issues in the future.

3. Open Permits

Similar to title and lien searches, before a real estate transaction, it is important to verify with the city that there are no open or expired construction permits on the property. Unresolved permits could prevent the new buyer from obtaining permits for future work until the existing permits are addressed and properly closed.

4. Estoppel Letter

When the property being transacted is part of a condominium or homeowners association, obtaining an estoppel letter from the association is a condition of the sale. This document, signed by an authorized agent of the association, details the fees owed up to a specified date. Typically, these fees are divided proportionally between the buyer and seller, as the transaction may occur between the association’s billing periods.

For example, if the fees owed are $1,000 due on the first of the month and the closing occurs on the 15th, both the buyer and seller would each be responsible for half of the $1,000. In practice, the seller will typically pay the full amount and have half be reimbursed by the buyer.

5. Notice of commencement

A Notice of Commencement is a document issued by the property owner to inform the public of upcoming construction or work on the property. While this notice itself does not create a lien on the property, failure by the owner to pay contractors after the notice is published can lead to a lien being placed on the property.

During a real estate transaction, the seller must terminate any such notices by obtaining an affidavit from any contractor confirming payment, or, in the case of a condominium or homeowners association, that the association has sufficient funds to cover the contractor’s fees.

6. Special Assessments

These assessments are charged by condominium or homeowners associations in addition to the regular fees paid by property owners. They are typically used to cover expenses for renovations or maintenance of the association’s common property. In the context of a real estate transaction, it is important to specify who will be responsible for paying any outstanding special assessments or how it will be prorated between the buyer and seller. Following the 2021 building collapse in Surfside, many condo associations have introduced steep special assessments to prevent similar tragedies from reoccurring leaving many with a new financial burden they had not planned for.

7. Documentary Stamp tax

This tax is one that is levied when certain types of documents are executed. These can include deeds of sale or mortgages for example. Therefore, when a real estate transaction closes in Florida this tax needs to be accounted for and the seller is usually responsible for paying it. The exact amount of this tax can depend on the document in question or the county where the property is located. Generally, however this tax is levied as a percentage of a given transaction. For example, in the case of a real estate sale it can be 0.7% of the sale price of the property being transacted. This contrasts with Quebec, where the buyer is responsible for paying the transfer tax on property.

8. Foreign Investment in Real Property Act (FIRPTA)

When a non-resident, including Canadian sellers, sells U.S. real property, FIRPTA mandates that 15% of the gross sale proceeds be withheld and remitted to the IRS. This process, typically carried out by the escrow agent, ensures the IRS receives payment for any potential capital gains tax owed by the seller. However, this withholding is not the seller’s actual tax liability but a mechanism for securing the payment.

While Canadian sellers must file a U.S. tax return to report the sale and any capital gains, they may be eligible to apply for a refund of all or part of the withheld amount. If there are no capital gains or if the withholding exceeds the actual tax owed, a refund can be requested. The reimbursement process, however, can take more than a year from the closing date.

There are however, exceptions that may reduce or eliminate the FIRPTA withholding requirement:

1. Sale Price Under $300,000: If the property sells for $300,000 or less, and the buyer plans to use the property for personal use at least 50% of the time over the next two years, the withholding requirement is waived.
2. Sale Price Between $300,000 and $1,000,000: If the property sells for between $300,000 and $1,000,000, and the buyer intends to use the property for personal use 50% of the time over the next two years, the withholding rate is reduced to 10%.
3. FIRPTA Withholding Certificate:  The FIRPTA withholding certificate is a key exception for Canadian sellers of U.S. real estate. Unlike the first two exceptions, which reduce or avoid withholding prior to closing, this certificate reduces the withholding after the closing. The main advantage of this certificate is that it prevents the automatic remittance of 15% of the gross sale proceeds to the IRS and instead allows the seller to prove that their actual tax liability is lower.

To apply for a FIRPTA withholding certificate, the seller must submit an application to the IRS by or before the closing date. The process for the IRS to approve the application can take 90 days or more, if the seller has an Individual Taxpayer Identification Number (ITIN). If the seller does not have an ITIN, an additional delay occurs as they must apply for one alongside the FIRPTA certificate. Once the IRS approves the certificate, the withholding agent (typically the escrow agent) will remit the correct amount to the IRS and return the excess funds to the seller.

Examples with and without the certificate:

A Canadian sells a US property for $400,000 with a hypothetical capital gains tax liability of $15,000. The 15% withholding would be $60,000 which would be held by the escrow agent. Once the certificate application is accepted the escrow agent remits the sellers tax liability, $15,000 in this example, to IRS and returns the balance of 45,000$ to the seller.

If we took the same example without the certificate the seller would have to wait for the IRS to process the 45,000$ reimbursement which can take a year as of the closing date.

9. File US and Canadian Tax Returns

Canadians who sell U.S. real estate are required to file U.S. tax returns to report this U.S. source income. Additionally, the sale must be reported on their Canadian tax return to account for the proceeds received by a Canadian taxpayer.

The Flip side

If the costs seem overwhelming and you’re considering other options refinancing or renting out your property might be alternatives to consider.

The benefits of renting out your Florida real estate are clear: it provides you with the opportunity to maintain ownership while offsetting some or even all of the costs associated with property ownership. However, renting isn’t without its considerations. It can expose you to potential liability if something goes wrong, and once you begin generating U.S. sourced income, you’ll become subject to U.S. tax obligations. Therefore, properly structuring ownership is essential to mitigating potential liability and minimizing the risk of double taxation, something we can help you navigate effectively.

Another option to consider is refinancing the mortgage on the property, which can offer several benefits. If interest rates have decreased since you originally purchased the property, refinancing could allow you to replace your current mortgage with one that has a lower interest rate and/or a more favorable repayment plan. If done strategically, this could free up capital to cover new expenses. Another refinancing option is borrowing against the equity you’ve built in the property, providing you with the liquidity needed to invest back into the property and manage rising costs.

To conclude, markets are dynamic, and so are your financial and personal goals. While rising costs may make selling seem like the most appealing option right now, holding on to your property and capitalizing on its appreciating value could prove to be a more strategic choice long term. That’s why consulting with expert advisors who can provide personalized guidance and help you navigate the best path forward is crucial for making a well-informed decision regarding such an important investment.

If you’re considering buying or selling U.S. real estate and want to explore your options, we invite you to consult with one of our professionals at Levy Salis LLP. Our team will provide expert guidance, offering a comprehensive analysis to help you determine and implement the best strategy tailored to your needs.