In the past year, economic conditions have likely left Canadians thinking about whether to cash out on property in the United States. Property in the United States has appreciated well beyond the post-2008 levels at which many Canadians purchased, and the Canadian dollar seems to have risen out of its doldrums against the U.S. dollar.
More recently, Florida and Texas have experienced the kind of extreme weather that makes real-estate investors wary.
After four years of gently waning Canadian interest in American real estate, sales of U.S. property to Canadians increased by 26 per cent in the fiscal year ending in March, according to the National Association of Realtors. Canadians bought 33,819 properties in the United States, up from 26,851 the year prior.
In addition, the total dollar value of purchases more than doubled, to $19-billion from $8.9-billion (U.S.), reflecting a preference for pricier properties, according to Gay Cororaton, a research economist at the association.
“Rents are still increasing in areas popular with Canadians,” says Ms. Cororaton. “Vacancy rates are still low, and now with Hurricane Irma, some of the resources that would go to new building supply have to be re-allocated. So there’s not a big incentive, I don’t think, to sell property.”
In recent months, a rising loonie has sparked some mild interest in cashing out before exchange rates become too unfavourable, experts say. But a complex tax regime for sellers, and the continued profitability of rental properties amid tight supply in popular sun destinations, mean that Canadians are generally biding their time. And many may not be particularly worried about the impact of a rising loonie.
“Many Canadians have money down here in different forms and assets anyway,” says Arthur Martens, a real-estate advisor and broker associate in Palm Beach, Fla. “A lot of higher-net-worth individuals will have enough U.S.-based assets to be able to move money around, and won’t take the whole exchange hit.”
To put it more succinctly, “you don’t buy the yacht and worry about the price of gas,” says James McKellar, director of the Brookfield Centre in Real Estate and Infrastructure at York University’s Schulich School of Business.
“I’ve seen it in conversations,” he says. “I’ve had some folks looking to take advantage of the dollar and price appreciation since 2008.”
But recent changes in taxation, especially on properties worth more than $1-million (U.S.), have added an additional burden of cost and time on sellers. Among them are updates to the Foreign Investment in Real Property Tax Act (FIRPTA), a law that specifies withholding-tax rates to be levied on sales of property in the united states by foreigners.
Until last year, the withholding rate was levied federally at 10 per cent for properties selling above $300,000 (or for any amount, if the buyer did not intend to use it as a primary residence). Last February, changes to FIRPTA raised the withholding tax to 15 per cent on properties selling at $1-million or more.
The Internal Revenue Service may grant a request to reduce or eliminate the tax for properties in the $300,000-to-$1-million range, especially if the new purchaser intends to use the property as a primary residence, or the property sells at a loss. But in that case, the seller needs to file paperwork with the IRS and acquire a taxpayer identification number – beginning a chain of paperwork and bureaucratic hassle that for some sellers can feel like more trouble than it’s worth.
In addition to FIRPTA, some states levy their own withholding tax, though not Florida or Arizona, the two most popular states with Canadians, which attract 37 and 17 per cent of all Canadian buyers, respectively, according to the National Association of Realtors.
“At the upper end, people are looking at golf-course communities and gated communities,” he says. “They’re looking for exclusivity, and many also have colleagues and friends involved.
“There seem to be areas or compounds that they collect in, and whenever I talk to these people, it’s notable that they’re buying into a sense of community, especially around areas like Palm Beach.”
The biggest issue facing potential buyers and sellers today may be extreme weather, however. Realtors in Florida especially are waiting to see what the next few months bring in the aftermath of Hurricane Irma. But even there, optimism runs high.
“It’s possible we could see a small slowdown as a result, and if we get more extreme weather, some increased selling among older or risk-averse buyers,” Mr. Martens says. “But you’ll see younger buyers or investors saying, ‘I’ll use this opportunity to buy at a discount.’ I think we’d see a demographic profile shift rather than a major volume change.”
Or, worst-case scenario, a shift in buying patterns.
“I have talked to clients and others who are anxious about weather impacts, about insurance, about the future,” says Mr. Ritchie. “But there are less vulnerable areas to buy. Maybe Georgia or the Carolinas might be better for them.”
Ultimately, says Mr. Martens, “As long as there’s snow in Canada, there’s going to be a market.”