What to do with that U.S. condo

 In Estate Planning, Retirement Planning, Tax

Those who bought U.S. real estate for their warm-weather retreats when prices were low and the loonie was strong now have potentially lucrative options. Here’s what to do if you were one of them.

Option A: Sell

Say you paid cash for a Florida condo five years ago for US$150,000, when the loonie was at par. If you can sell for US$250,000, not only do you make US$100,000 in profit, but with the Canadian dollar worth 75 US cents, you’ll gain an extra CA$75,000 when you convert that US$250,000.

Pros: It’s very difficult to argue with such an amazing return.

Cons and considerations:The biggest con for snowbirds, though, might be the loss of a retreat. Many may find it difficult to get back into the market, or that renting at current exchange rates is prohibitively expensive.

You’ll have to pay capital gains tax not only on the profit but also on the additional income generated by exchanging it, since you must report your gain in CAD.

Option B: Rent your place

If you’d like to hold onto your vacation home but want to take advantage (or offset the pain) of the current exchange rates, one option is to rent it out while you’re not there.

Pros: You can generate U.S. income to help offset the costs of upkeep and Stateside living expenses, while holding on to your property.

Cons and considerations: You’ll have to declare that rental income to both the Internal Revenue Service in the U.S. and report it as worldwide income to the CRA. Talk to an accountant or tax lawyer well-versed in cross-border taxation issues, in order to avoid double taxation.

Becoming a landlord carries its own risks and obligations. In addition to tenant insurance, you’ll need to be covered for liability.

Keep in mind that in some states, renting for less than six months obligates you to charge a state and tourism tax, and remit that money to the state.

Canadians who own foreign property valued at more than CA$100,000 have to report it on the CRA’s form T1135. While there’s an exemption on personal-use property, rental units must be disclosed.

Read: Taxation Issues that Snowbirds Need to be Aware of

Option C: Downsizing

Say that, back in 2012, you bought a three-bedroom condo for US$480,000. Now it’s appreciated to US$750,000. It may make sense to downgrade and pocket the difference.

Pros: Assuming your property’s value has gone up, you make a tidy profit while still retaining equity. You get the bonus of the advantageous exchange rate, and you still have a warm place to travel to every winter. What’s more, you can rent out your property when you’re not using it or refinance it at a later date.

Cons and considerations: You still have to pay capital gains tax on proceeds from the sale, as well as on any money you make repatriating cash to Canada. The selling season is coming to a close: by March and April, buyers have left the sunshine states for home.

Option D: Refinancing

If you own your property outright, it may make sense to remortgage and get cash out of it. Typically, a U.S. bank will lend somewhere between 50% and 75% of the appraised value of the property.

Or you could double (or even triple) up on strategies: if you refinance the property, invest the money in Canada, and rent out your home while you’re not there, you can use the rental income to maintain the place and pay down the mortgage. At that point, you’ve maximized your leverage of the currency exchange. You’ve completely eliminated the cost of borrowing and completely eliminated the risk of currency fluctuation.

Pros: If you’re refinancing rather than selling, the income generated by exchanging your dollars doesn’t count as capital gains, and so you don’t pay tax on when you exchange your greenbacks for Canadian dollars. You get to hold on to your vacation property.

Cons and considerations: You’ll likely want to keep some of the money from the deal in the U.S. to cover the cost of your property’s upkeep and service your debt. Keep in mind that your ownership structure needs to be in line with banks’ requirements. Many banks, don’t like to lend to trusts or corporations.

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