Canadian Corner: Your US Real Estate Questions Answered

More and more Canadian residents are heading south to find a second home or investment property in the sun as the Canadian currency reaches parity with the U.S. dollar. About 27,000 Canadians bought vacation homes in the U.S. last year, according to the NAR (National Association of Realtors). As the Canadian currency (known as the loonie) continues to appreciate, Canadian buyers will continue to seek winter retreats in sunny states like Arizona. 

Common Canadian Questions & Answers Regarding the purchase of Arizona Real Estate

How long can a Canadian Citizen visit or "winter in" Arizona?

• You will often hear that the magic number is 6 months.....then you must marry a Citizen or go home :-) Most Canadian 'snowbirds' travel to America as temporary visitors (tourists).  There are two tourist visas, visitors for business (B-1) and pleasure (B-2).  These are usually easy to get. Canadians usually do not get any stamp or paper showing this status.  Immigration inspectors allow visitors up to six months per trip.  Under NAFTA, certain Canadians can get B-1s for a full year per trip. 
• Discard this common misconception:  "As a snowbird visitor, immigration rules force me to go back to Canada for six months before I can come back to America.  I can only stay in the U.S. six months a year."  This is false.  There is no immigration prohibition against leaving and returning right away.  Of course, without a green card, Canadians cannot intend to reside permanently in America.  If you keep turning around and coming right back without staying in Canada, immigration may assume that you have permanent intent.  Nevertheless, there is no automatic obligation to wait six months in Canada.  (Tax rules may differ.)
• Bottom line, though, is that it gets kinda warm here (ok, so maybe it can get SCORCHING HOT) from May - October, so I recommend you visit sometime between November and April.

Can Canadian buyers obtain financing on an Arizona property?

• Yes. Our clients who have financed purchases recently have used Washington Federal Savings, U.S. Bank, Harris Bank, and RBC. The Bank of Montreal owns Harris Bank and Harris Bank will finance Canadians that have a relationship with Bank of Montreal such as a bank account. Another source that you should explore is RBC. Most of the mortgages that you will get in the US as a Canadian will carry a premium, because as a foreigner you will be perceived to be an increased risk. This is because you probably do not have a US Social Security number nor any income or assets in the US. For instance, in the US you need a credit score. You can get your Canadian credit rating but if you default on a US loan, it will not effect your Canadian credit score.
• There is another alternative and that is to finance the home in Canada on your Canadian credit and pay cash for the US property. Before you brush that off, think about the added risks you are undertaking if the Canadian dollar drops back to its historic levels. Obviously your payment would remain in US dollars and cost you more Canadian dollars assuming that you don`t have US income this could be a problem. Keeping your loan and payment in Canadian dollars will reduce risk.
• If the US dollar drops and you are earning Canadian dollars, well then you would experience a wind fall. You should consult an accountant about this. 

What restrictions are there for Canadian or Foreign National buyers purchasing homes in Arizona?

• There are no restrictions that I am aware of on foreign nationals buying U.S. or Arizona property.

What are the closing costs and fees associated with buying a property in Arizona?

• Arizona does not have a real estate transfer OR Sales tax.
• Your biggest "closing cost" will likely be the fees you pay to your lender. Those fees vary greatly from lender to lender and from one loan program to another.  Most Canadians are paying all cash so, of course, they are paying no loan fees.
• You will also pay for most or all of these: a home inspection, a termite inspection, an appraisal, an escrow fee, title insurance, a county recording fee, and if the home has a Homeowners Association (HOA), additional HOA fees such as an HOA transfer fee (sometimes paid by the seller), working capital, reserves, etc.  These will vary greatly from one HOA to another.
• In addition, at closing you will pay for some future expenses in advance. These "pre-paids" may include property taxes and homeowners insurance.
• Attorneys are not typically involved in Arizona residential real estate transactions so that is a expense you will not have in Arizona.  Instead, neutral third party Title Companies are used.
• To help offset the initial cost of the infrastructure of a resort like community, some neighborhoods have a Special Assessment or Community Facilities District Tax (CFD), such as Anthem at Merrill Ranch in Florence, AZ.  These are additional fees that you may not pay on another property in another neighborhood.  It is always wise to use a Realtor that specializes and has experience selling in a neighborhood such as this, so that these fees do not come as a surprise at the last minute.

How high are property taxes in Arizona?

• Property taxes are very low in most parts of Arizona.  In addition, Arizona does not have a two-tier property tax system like California and Florida where new homeowners pay more in property taxes than other homeowners. A new Canadian homeowner will pay the same property tax rate in Arizona as their American neighbors next door.

How high are HOA fees in Arizona?

• Be aware of homeowner association (HOA) fees, they can vary greatly. All condos and the majority of homes in Arizona have HOA's, so do your due diligence on the HOA prior to closing escrow on your home.

Will Canadians pay tax on rental income generated from Arizona investment property?

• Yes, the IRS will tax income from real estate owned by nonresident aliens.
• Snowbirds who rent out their real estate located in the U.S., should beware: a withholding tax of 30% normally applies to the gross amount of any rent paid to a resident of Canada on real estate located in the U.S. Unlike withholding taxes on interest and dividends, this tax is not reduced by the Canada-U.S. tax treaty. One way for Canadians to avoid the 30% gross withholding tax is to file a U.S. tax return and elect to pay tax on net rental income. The Canadian resident can then receive a refund for any taxes withheld, to the extent the withholding amount exceeds the tax payable.
• If a Canadian owns U.S. rental property and incurs significant expenses (mortgage interest, maintenance, insurance, property management, property taxes, etc.) he/she may want to file a U.S. income tax return and take advantage of the net rental income election. The amount subject to tax at the marginal rate will likely be substantially lower than the amount subject to 30% withholding.
• Interested buyers should contact an accountant or lawyer for details.

Will Canadian homeowners be subject to capital gains tax when they sell their Arizona property?

• Yes, foreign nationals are subject to U.S. capital gains taxes on real estate sales.
• Because the U.S. Internal Revenue Service (IRS) can't easily go after foreign nationals to collect this capital gains tax, there are special U.S. tax "withholding" requirements when foreign nationals sell real estate.
• If a Canadian sells real estate located in the U.S. , a withholding tax of 10% of the gross sales price is normally payable under FIRPTA (the Foreign Investment in Real Property Tax Act of 1980). The tax withheld can be offset against the U.S. income tax payable on any gain realized on the sale, and refunded if it exceeds the tax liability. The 10% withholding requirement on the gross sales price applies regardless of the sellers adjusted basis in the property.
• There are two exceptions to FIRPTAs 10% withholding requirement which may reduce or eliminate the requirement.
• Exception 1: Sales price less than U.S. $300,000. First, withholding under FIRPTA will not apply if the property is sold for less than U.S. $300,000, and the purchaser intends to use it as a principal residence. The buyer need not be a U.S. resident. For this exception to apply, the purchaser must have definite plans to reside at the property for at least half of the time that the property is in use during each of the two years following the sale. However, the gain on the sale will still be taxable in the U.S., and a U.S. tax return must therefore be filed. Thus, if a Canadian is selling a Florida condo or any other U.S. real estate, for less than U.S. $300,000 to a buyer who intends to occupy it as a principal residence, the seller will receive the full purchase price rather than having 10% withheld by the buyer and remitted to the IRS.
• Exception 2: Withholding certificate. The second exception allows for reduced, or eliminated withholding, where the Canadian obtains a withholding certificate from the IRS on the basis that the expected U.S. tax liability will be less than 10% of the sales price. The certificate will indicate what amount of tax should be withheld by the purchaser rather than the full 10%. A withholding certificate issued after the transfer of the property may allow the seller to receive an early refund.
• Interested sellers should contact an accountant or lawyer for details.

One last point, before you buy anything make sure that you do your research. Buying property in the US is not something you should do without getting proper advice. I know that this sounds like a normal disclaimer but believe me, you want to know exactly what you are doing before you hand over your hard earned cash and assume a liability in a foreign land. For example, you will want to connect with a Realtor that works with Canadians and that is capable of properly representing your best interests....like us! Going through a competent Realtor that specializes in second homes and vacation neighborhoods will not cost you anymore, so search them out in the market that you are considering buying in. In my opinion, you are right to be looking now. Many exceptional deals are available in a number of markets right now and if things do turn around, you are going to have a pretty good chance of being very happy with your choice. Good luck and good "house" hunting.

If you're in the market to purchase a home in Arizona, now is clearly the time to buy!  We specialize in assisting Canadian homebuyers with a vacation home or investment purchase.

About the Author...

This article  was provided by Jessica Sulliman, a Nationally recognized Realtor and Certified Short Sale & REO Specialist.  Jessica can be reached via e-mail at jessica.sulliman@ashbyrealty.com by cell phone or text message at 602-677-7977. Jessica has helped thousands of people buy and sell their home.  For Arizona real estate and homes see www.jessicasulliman.ashbyrealty.com 

Specializing in the following Metro Phoenix areas in Arizona: Queen Creek, Gilbert, Chandler, Mesa, Scottsdale, Apache Junction, Gold Canyon, Tempe, Florence, San Tan Valley, Coolidge, Casa Grande, Eloy, Maricopa, Ahwatukee, Anthem at Merrill Ranch resort community in Florence AZ.

Check out my blog: http://jsulliman.activerain.com