Snowbirds and Real Estate

BY JAY BRIJPAUL

The winter season spurs thousands of snowbirds to fly south every year. Similarly, as a result of the cold, many choose to invest in a second home rather than rent. With ownership, they can travel light, knowing that their home has everything, from the family portrait to their comfortable pillows. When buying a vacation home outside Canada, there is much to consider.

Start by looking at various financial options. One is to refinance the Canadian home and buy the vacation home in cash. Another is to look for financing using a Canadian bank who conducts business in that country. Ask for referrals from other families who’ve bought. Their experiences are vital, and they can refer a local lawyer, realtor and lender. In places like Florida, with a 30% down payment, a buyer can secure financing. In addition to the down payment, the buyer must add about 2% of the value of the property for cash purchase and 5% for properties with a mortgage.

When shopping for a home, choose location, then size, and then upgrades. We can always upgrade a bigger home, but it is difficult to extend a smaller one. Look for proximity to shops and public transportation. Look at statistics, such as neighborhood population growth and income level. If the neighborhood population growth and income level are strong, it is a good investment but if there is a decline in population and income levels are low, then property values will fall. Before purchasing, spend about two months renting and getting to know the neighborhood.

Avoid beach front properties. They are expensive and with climate change, can be targets for flooding and hurricanes. Insurance costs are higher and may not cover certain natural disasters. With rising sea levels, beach front properties will depreciate over time. Consult with a local insurance agent before deciding.

For resale homes, knock on a few doors around the potential property and meet the neighbors. Ask the realtor to research what similar homes sold for within the last ninety days so that you can make an informed decision. Prior to purchase, meet with the owners. They will know the property better than any realtor. Always submit an offer to purchase subject to financing, inspection and lawyer’s approval.

When buying a newly built home, research the builder and review their agreement with a local lawyer. A lawyer will ascertain whether or not there are any contractor liens on the property. For example, if the roofing company did not get paid from the main contractor, they can put a lien on the property. A supplier can also register a construction lien.

Some buyers may prefer to live in a gated community where services such as security and lawn maintenance are included but association fees can be high. There are restrictions on what an owner can do and in some gated communities, renting the property for extra income when the owner leaves is not allowed. Use the lenders as a litmus test before buying. For example, if the lender refuses to finance based on a specific type such as time-shared properties, then do not buy.  Always buy what is easy to sell.

Buyers must consider tax implications. Veronika Chang, JD, LLM, a tax lawyer based in Toronto, explains that under the U.S tax rule, a “US person” is subject to U.S tax on their worldwide income. To qualify as a “US person”, buyers must spend an average of 122 days or more in the United States. The amount of days can be increased to 183 days with proper tax planning (U.S. Tax 2019).

If we choose to rent the property when we are away, then rental income is subject to 30% withholding tax unless done correctly. According to David Altro , B.A., J.D., D.D.N., F.Pl.,  a Florida attorney and Canadian legal advisor,  “renting out your US  property also comes with a number of tax, liability and legal matters that must be properly addressed, as failure to address these matters can lead to big headaches and even bigger financial liabilities” ( Snowbird Advisors 2019). Death and taxation are certain, so it is imperative to seek professional advice on estate planning and taxation. If done with caution, snowbirds can bask in the sun on the sandy shores while their investments blossom.

As owners, remember your friends who may want to spend time with you at your new properties. However, it can become overwhelming.  Let’s take Ben Franklin’s, the man who invented the lighting rods advice: “Guests, like fish, begin to smell after three days.”