Canadian resident- How to buy a home in USA?

Has anyone bought insurance on a vacation home in the US lately? Because insurance companies usually get shirty about properties that are unoccupied for extended periods, I was just wondering.

We are buying a condo in the US and seem to be having very good luck with State Farm Insurance. Mind you, is it a condo and we only require tenant insurance. Let me know if you want any more info. Good luck!

My wife and I are looking at purchasing a condo in Maui. Our intent is to rent it out ASAP. I am wanting to use available credit from a HELOC to purchase the property outright. I figure I can pick up a great deal if I offer a motivated seller a shorter closing term. I do not however know the tax implications of doing so. I am assuming I will not be able to claim my interest as an expense on my US tax return. Would I be wiser to go through the added pains and initial costs of applying for a mortgage in the US?

Any help on this topic would be greatly appreciated.

Regards,

Arthur

seem to be having very good luck with State Farm Insurance

I wouldn't use State Farm if they put a gun to my head. They stiffed thousands of people after Hurricane Katrina and they stiffed a lot of my neighbours when I lived in Florida after Hurricane Andrew. "Oh, it's not flood damage, it's hurricane damage" and vice versa, depending on what your policy said.

My insurance rate on my condo went from $40 a year to $400 a year, and that was after all the insurance companies pulled out and the State of Florida took it over - and the State of Florida wasn't making a profit. But at least you were actually insured instead of having to sue State Farm.

Although having said that I suppose there aren't many hurricanes in Arizona, but I still wouldn't use them.

Like you say though it's only contents insurance. I suppose the best idea is to check and see who the condo association use.

This is an FYI. If you are Canadian and own property in the US and set it up as Trusts, there is no tax, no probate and the property just passes on down the line. Now there are $$ involved in setting all this up legally but is well worth it. You can post a reply here and we can communicate by email if you want more information (this is the legal info I received today).

I assume you mean a US trust? There's no estate tax in Canada anyway and probate in Alberta is $400 either way. Not sure I see an advantage but I'm all ears!

You're also liable to US capital gains tax when you sell it (not a big problem at the moment as the US and Canadian rates are the same on real estate, so you claim the foreign tax credit in Canada, but if the US rate goes up, then you could face problems).

I overgeneralised when I said this. The rates are roughly the same but the US has changed the equation as the US capital gains tax rate has been lowered to zero on capital gains of up to $31,850 for 2008. So you may not be subject to CGT at all anymore in the US. Over that amount it's 15%.

The Canadian rate for the average person with an average income with an average transaction is usually around 15% but the actual rate is 50% of the marginal tax rate. So if you're in the top tax bracket in Ontario it could be as much as 21.5%.

Long story short, the CGT will almost always be higher in Canada than in the US (even if the US raises their rates in 2011 as the legislation currently says), so the CGT rate in Canada is the one to base your investment on as you claim a foreign tax credit in Canada for the tax paid in the US. If any. Even if there is zero tax in the US you have to declare the capital gain on 1040NR.

Does this mean that if I buy a home in Florida, I can just add my Canadian kids to the deed as joint tenants with rights of survivorship and leave it at that?

The reason I mentioned that was that it's a good way to hide your money from the CRA. For example if you have $150,000 and you earn bank interest on it, you have to declare the asset and the income to the CRA and pay income tax on it (and probably get a 1099-INT and do a 1040NR if the money is in the US).

This last bit was wrong too, there is no tax paperwork in the US on bank interest, but you have to file Form W-8BEN with the bank.

But it's still a good way to hide your assets from the CRA!

Steve, THANKS for all of your posts. You really know what you're talking about.

In response to the person who posted about the TRUST method of owning a US property, please tell us more!

For everyone, have you seen some of the AUCTIONS (!) in the States? Wowsers. We were thinking Las Vegas but now thinking Southern California. It's pretty exciting wherever you want to buy -- especially considering housing prices in Western Canada.

As I said in the other thread, bear in mind property taxes in Vegas are quite high.

I can't see how using a trust helps, a trust merely defers the capital gains tax. A trust can only exist for 21 years and at the end of it you have to pay 50% income tax and 50% capital gains tax, which essentially means you pay more by deferring it rather than paying it up front as the CGT rate is 50% of the income tax rate, so effectively the trust rate is 75% of the income tax rate.

I admit I'm not an expert on trusts, there may be a type of trust whereby you can do as suggested, but it seems unlikely to me the CRA would allow you to avoid capital gains tax indefinitely.

The only reason to use a trust I can see is the old-fashioned reason for them, i.e. you want to pass on the tax to your kids and by the time the 21 years expire they'll have the money to pay it.