Paying for a property using a Canadian LOC

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

Read this: http://www.cra-arc.gc.ca/E/pub/tg/p151/README.html

Also have a read of CRA Form T1164 if you don't already fill it in. And the CRA capital gains tax guide. The document in the above link will give you a list of all the relevant IRS publications, the main ones are publications 515 and 519.

Basically what it boils down to is this (but read up on it to know the details):

It's best to get the money from a Canadian lender, to insulate yourself against changes in the exchange rate.

If you don't rent it out, you don't need to declare it to the CRA until you sell it, at which point you have to pay 15% capital gains tax in the US, then claim the foreign tax credit in Canada (at the moment the rates are the same so it's 15% plus some paperwork, there is talk of the US rate going to 20%, which would make it more complicated).

If you rent it out it gets quite complicated, there are two ways the IRS lists in that CRA document on how to go about it, by far the best method they list is on page 19 in the second and third paragraphs.

But basically you have to declare the income to the IRS, and it's treated as income in the US, you pay tax on it in the US and claim a foreign tax credit in Canada as described in the general guide for the T1 return. If you rent it out, you must also declare the value of the property annually to the CRA on Form T1164 as well as the income from it.

Based on the experience members of my family have had with doing this, I'm not sure renting out a single property located a long distance away is that good of an idea unless the people renting it are friends or relatives who you trust. Costs of hiring a management company, advertising it, keeping the thing maintained, being tied down to visiting it, paying the taxes and so on basically turn it into a poorly-paid job as far as I can tell.

If you get into a legal situation where the tenant owes you money, it's a royal pain if they're in a different jurisdiction and you have to go to court.

Hi Steve,

Thanks for the info. You seem very knowledgable.

It does seem like a major hassle. I am reconsidering.

Arthur

Hi Steve,

Sorry, one more question. I read somewhere that if you own a rental property in the United States you are not permitted to do any sort of work on it. Have you heard of this? I don't really understand why that would be considering I am volunteering to do the work myself. It's not like I would be taking work away from anyone.

Arthur

Technically it's true, but I've never heard of anyone being deported because of it. The reason being that you're "working" and fixing up a house is not considered to be a "volunteer" position as defined by USCIS. For example if you bought a whole block of apartments and did work on them and then sold them off at a profit, clearly you're operating a business, generating income and so on.

Working on your own vacation home though I wouldn't lose any sleep over, ICE have got far better things to do.