Faced with the promise of another long winter and the low, low prices of houses in the United States right now, purchasing property across the border can be tempting. But should you spend hard earned money on property in the U.S.?
Regardless of the location, (most types of) property in any country is worth the investment, especially if you expect to get a lot of use out of it. Whether your plan to use the property as a regular vacation destination or intend to use it for rental income, there are some serious considerations in owning property in a foreign country (even if that country shares a handful of landmarks and a continent).
Money Money Money
As with any investment deal, your first consideration should be finances, and with the current exchange rate favouring the U.S. market, money is a pretty big deal.
By borrowing in the U.S. with a U.S. bank you can avoid having to convert the full amount of your loan. With your monthly payments in U.S. dollars you may be able to save a few dollars over time by converting smaller amounts, with the hope that the exchange rate will once again turn in Canada’s favour.
Know also that the process to obtain a U.S. mortgage requires more documentation than the typical Canadian mortgage. The U.S. real estate market is highly regulated, and the process can be lengthy, taking upwards of 45 days.
Purchasing a large investment, like property, in a different country, can come with complicated taxes, and the Canadian Professional Accountants, Ontario recommend making your purchase through a certified Canadian trust or other Canadian or U.S. entity with an in-depth knowledge of both Canadian and U.S. real estate rules rather than make the purchase in your name in order to simplify the tax and legal issues associated with owning U.S. real estate.
There are several ways to take ownership of a property in the U.S. – own the property personally, as a trust, as a limited liability company, or a limited partnership:
- Trust – a land trust is an arrangement in which a trustee holds title to real estate for the benefit of another party. The trustee has no duties except to sign paperwork at the direction of the beneficiaries. Check out this article for 10 reasons to use land trusts to purchase real estate.
- Limited Liability Company – specific to the U.S., a limited liability company (LLC) is the form of a private limited company. It is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. Bizadvisor shares a few great reasons to purchase property as an LLC.
- Limited Partnership – a limited partnership (LP) is a form of partnership that is similar to a general partnership, except it must have at least one general partner and one limited partner. Read more about Real Estate Limited Partnerships here.
If you decide to use the property for rental income, you’ll be exposing yourself to more risk than if you were to occupy the house yourself, though you can purchase insurance to protect yourself from some liability issues. If an tenant slips and falls, they have the option to sue. In the case of using your property to generate income, you may consider owning it in a limited partnership or in an irrevocable trust for creditor protection.