Buying A House In Florida As A Canadian: 5 Things To Consider
Whether you’re a Canadian snowbird or just simply a US real estate investor, there are plenty of good reasons to search for property in Florida. The east coast of the United States has recently been a prime destination for Canadian retirees.
Known as the nation’s sunshine state, Florida offers a warm escape from Canadian winters along with year-round pleasant weather. If you’re seeking a comfortable lifestyle Florida is the place to be.
TOP 5 THINGS TO CONSIDER WHEN PURCHASING PROPERTY IN FLORIDA
Before you make a purchase it’s best to stay informed about the tax implications and expenses that come with US home ownership. We’ve created this brief guide to help kick-start your research.
As always, the best way to stay fully informed is to consult multiple sources and consult with an industry professional.
#1 ESTATE PLAN IMPLICATIONS
If you’re approaching your golden age, it’s crucial to understand how the purchase of a foreign property will affect your estate plan. While it’s not an easy topic to discuss, passing away can often have adverse effects on your post-mortem wealth distribution, especially if you haven’t prepared beforehand.
Effects of a Probate
Assuming the Florida property is not your principal residence at time of death; its value can be subject to multiple charges and fees before it gets distributed out to beneficiaries.
This can have a negative emotional impact (not just financial) on your loved ones, since they’ll likely have a lot to deal with as the estate plan becomes realized.
Probate can take up to a year, and until it gets finalized (meaning that necessary dues are paid out) dealing with asset ownership within the estate is a struggle. Fortunately, there are some ways around this based on how you purchase the home.
#2 PURCHASING METHODS
How you choose to pay for the property can greatly affect your probate filing and other taxation. There are a few legal workarounds that you could use to dodge a few charges, but they all typically come with pros and cons.
The joint signature method helps maintain asset ownership rights when you’re buying a secondary house. Speaking plainly, if one owner of the property passes away the co-signer receives full ownership rights.
Of course the only drawback with this strategy is that it’s technically “single use” – the moment both co-signers are deceased, estate planning debts come back into play.
To steer clear of the probate system as a whole, you can formulate a corporation in your home country (Canada) and register the purchase under the company name. By doing this, your Florida property belongs to an entity that doesn’t “pass away” in the traditional sense.
Naturally, if you decide to do this you’ll have to deal with the tax consequences. Your company will be subject to multiple nation tax filings (Canada and US) that include any income generated from the property.
BEST: Apply For A Cross Border Trust
CBTs are widely regarded as an efficient way for Canadians to purchase homes in the United States. A cross border trust will allow you to access the lowest tier of taxation on the home, while simultaneously relieving you of dual-nation tax charges.
Another benefit to the CBT is that it labels the property as ownership of the trust, as opposed to individual/personal ownership. In other words, this is another method you could use to avoid probate.
WORST: Avoid Using LLCs and LPs!
We strongly recommend staying away from these two strategies as a Canadian buying property in Florida. While they can prove advantageous in niche situations, they’re certainly not meant for everybody.
Since Limited Liability corporate fronts are not recognizable under the official Canadian corporate system, you’d have to apply for one south of the border.
This can come as a huge tax detriment from Canada, since the CRA will tax you as a regular corporation with no special tax-deferring privileges. In addition to this, you’ll still be paying individual taxes on the property in the US – assuming you’re the company owner – since the LLC does not get taxed directly.
Limited Partnerships can also come with unnecessary hassle. Since they consist of partial ownership between you (as the individual) and a company (as the partner) tax situations can get complicated.
Even if there are a handful of cases where these strategies prove beneficial, it’s generally advisable that Canadian tax payers seek alternative purchasing methods.
#3 SNOWBIRD REGULATIONS
If you’re planning on buying property in Florida solely for vacationing purposes, you need to take a few travelling precautions. By following the US visitor laws, you can ensure that you won’t pay more US tax than what’s necessary.
As a rule of thumb, if you’re snowbirding in your Florida home for the winter do not stay over your maximum yearly allowance. If you’re entering the US from north of the border, you’re only permitted to visit for 183 days devoid of US residency.
Theoretically, if you reside in the US for longer than the amount you’re entitled to, you will be fully taxed as a US resident. The only workaround for this rule is to fall back on the CAN-US treaty, but getting acquitted in this way can be a very lengthy (and also costly) process.
Passing The Presence Test
Even if you don’t allocate more than 183 days per year of your time in the United States, if you meet the specifications of a substantial presence test you could still be taxed as a US resident. The substantial presence test is essentially a tax-driven calculation involving a rolling average of days from the past three years spent in the US.
The requirements surrounding the test can be somewhat confusing – if you sum 100% of your US days from the most recent year, plus 33% of the days from the year before, and 16% of the days from the year before that one, the total cannot exceed 183 days.
Here’s a visual example shown in a table:
|SUBSTANTIAL PRESENCE TEST
||Days Spent in US
||Presence T Days
||217 > 183
Therefore, by the substantial presence test even if you’ve spent less than 183 days per year for 3 consecutive years you’d still be taxed as a US resident. This is due to the fact that you’ve scored 217 days out of the allotted 183.
TIP: In order to be completely safe from the substantial presence test, you’d need to spend under 122 days per year in the US for 3 consecutive years.
#4 COMMON MISCONCEPTIONS ABOUT CROSS-BORDER PROPERTY OWNERSHIP
Hurricanes make Florida an expensive place to live
If you plan on living right on Florida’s coastline, such as buying a beachfront property for example, you’ll likely face higher insurance premiums related to natural disasters. However, purchasing a home further inland is pretty much exempt from this insurance price hike.
The IRS taxes your total income once you’ve purchased a property in the US
Assuming you take the necessary precautions to avoid becoming an official US resident, you’re only taxed on the income the property generates. In other words, the IRS does not take all of your global income sources into consideration.
You can live in your rental property during the winter
Showing up to your rental unit with the expectations of staying there for a few months is basically an invasion of privacy. Assuming all of your units have been rented out, your tenant’s lease agreement states that the property is temporarily (for the length of the contract) under their possession – not your own.
Technically however, if you decided to rent out your units on a short-term basis (a few weeks) as opposed to a long-term basis (a few months to a year), you can easily live in it yourself for the winter once your tenants contracts have expired.
#5 SAVING ON CURRENCY CONVERSION
Gathering funds together for a foreign property purchase is not a simple task, and you’d likely wish to save money wherever you can. Unfortunately, the Canadian dollar is weaker than the US dollar currently, but you’ll lose much more than the CAD value when making numerous transactions.
Obtaining a constant supply of US dollars to pay for bills south of the border can be really expensive if done traditionally. Big international banks will often overcharge you with conversion fees and unfavourable exchange rates.
Alternatively, you can use a professional currency exchange like Knightsbridge FX to get a rate on your conversion that’s guaranteed to beat the banks. With Knightsbridge all of your foreign exchange transactions are safe, secured, and fast.
And if you want to learn more about snowbird taxation rules, check out our article on basic tax advice for Canadian snowbirds.