Buying a vacation property – what you need to consider
Owning a vacation home – whether for summer, winter, or year-round use – is a dream shared by many Canadians. With the loonie in good shape and U.S. vacation properties currently at bargain prices, more Canadians are looking southward for their dream retreat. In 2010, 23 per cent of all international U.S. home buyers were Canadian, up from 11 per cent in 2007.1
If you are considering buying a second property, here are a few things – beyond price – that you should consider.
- Canadian banks generally will not provide mortgages on U.S. properties. If you intend to raise mortgage money here to buy a property there, you will need to get a line of credit or increase the mortgage on your Canadian property to provide the funds.
- Mortgages in the U.S. are structured differently and can be difficult to obtain. Down payments are high – you will likely be required to make a down payment of between 30 and 40 per cent of the purchase price.
- How often will you be using your property? Even if it is infrequently, you’ll be paying ongoing expenses such as insurance coverage, perhaps a property management company, and other everyday costs of property ownership. Also, property taxes may be higher for out-of-state owners.
- To help offset some of these costs, you may consider renting your vacation property when you’re not using it. If you do, you will be required to file a U.S. tax return and will be subject to a 30 per cent withholding tax.
- If the loonie goes down, your U.S. living expenses will go up.
- If you reside in the U.S. for more than 183 days in a year, you will be required to file U.S. income taxes.
- Gift and estate taxes and probate are also different in the U.S. – which may complicate passing your property to the next generation.
- The U.S. health care system is different than ours. Make sure you take care of your personal health care, medication and home care requirements.
Whether your dream home is in the U.S. or Canada, you will need to decide how you want to structure the ownership of your property. Do you register it in the name of both you and your spouse, one only or use a trust? Ownership issues can be complex. It’s important to get good advice and to consider the issues in the context of your overall estate plan.
Protect your dream
Once you’ve taken the plunge and made your purchase, it’s important to protect your vacation property against unforeseen events. Home insurance offers essential protection against such events as fire and theft. If you’ve financed your purchase, you should consider life insurance to cover the outstanding mortgage in the event of your death or the death of a spouse.
And make sure you have enough disability insurance to maintain payments if you or your spouse are unable to work. There is typically a less liquid market for vacation properties, so a forced sale could net much less than the property’s true value.
There are many things to consider when buying a cross-border property. It makes good financial sense to talk to your Consultant before you buy.
1 Profile of International Home Buying Activity 2011. Page 12. National Association of Realtors