Four things retirees need to know about buying American real estate

In a couple of months, Canada’s airports and highways will once again be busy with retirees making their annual migration south. About 1.3 million Canadians flock to warmer climates every year and there are new people buying property in places such as Florida, California and Arizona all the time.

Last December, a Royal Bank of Canada survey found that 27% of people who are over 50 but not yet retired plan to become a snowbird once they leave the workforce. That suggests that at least a quarter of your clients will soon be asking you for advice on how to purchase a property south of the 49th parallel.

Owning real estate in the States is more complicated than many people think. While the actual buying process is the same—find an agent, make an offer on a house and eventually take possession—Canadians need to understand some complicated tax rules before making the decision to buy.

David Altro, managing partner at Toronto’s Altro Levy LLP, specializes in cross-border real estate issues and shares four things that soon-to-be snowbirds need to know about owning property down south.

Beware of probate tax

The biggest issue for U.S. home-owning snowbirds is probate tax.

If the retiree passes away, the estate will automatically be required to pay a percentage of the home’s fair market value to the state. In Florida, that tax is 3% of fair market value on the day of death. In California it’s 4%.

The home is essentially frozen until it’s paid. It can’t be sold or transferred to the person’s children.

The one way to get around this—and most of these issues—is to open a cross-border trust and make that trust the owner of the property. Do that and you won’t pay a dime of probate, says Altro.

He stresses that it has to be a cross-border trust and not a state domestic trust or a standard Canadian trust.

Incapacitation issues

When people near retirement age, they should create a living will that designates powers of attorney in the event incapacitation.

Unfortunately, many U.S. states won’t recognize that document, which means that power of attorney won’t be able to represent your client across the border, says Altro.

Getting that power back can be difficult. “You have to go through the [state] guardianship procedure and that means hiring doctors, physiologists, lawyers and more,” he says.

A cross-border trust can protect people. Usually the retiree is the trustee, but that person is allowed to designate someone else to take over in the case of incapacitation.

Estate tax trouble

This won’t apply to clients who have fewer than $5.3 million in worldwide assets. If Canadians do not reach that threshold, they won’t have to pay any estate tax on the property when they die.

However, if someone has more than $5.3 million in assets, the U.S. estate tax hit could be huge. The tax rate can be as high as 40% on the fair market value of the home on the date of death, says Altro.

Once again, the cross-border trust comes in handy. Any property in a trust will not be required to pay estate tax, he says.

Mortgage mayhem

When it comes time to take out a mortgage on the property, consider using a Canadian bank that has a presence in the U.S., says Altro.

Clients typically need some sort of U.S. credit history to receive a mortgage, which of course they won’t have if they pay their bills up north.

U.S. subsidiaries of Canadian banks are allowed to take Canadian credit into account, so it’s much easier to get money for your American abode.

However, there is an even simpler way to get financing. Open a home line of credit on your primary residence and use that to pay the buyer in cash. “The seller will like that a lot,” says Altro.

None of this should deter a client from buying property stateside—there are still plenty of good deals to be had—but they do need to know how the U.S. government works.

The last thing anyone wants is for that person’s family to be hit with a large and unexpected U.S. tax bill.