For the past few years, Canadians have been taking advantage of our dollar being worth about the same as the U.S. dollar. From buying up real estate to cross-border shopping, being on par with the U.S. dollar has had its advantages. However, in the last few months, economic factors have driven the Canadian dollar down, and it is now worth about three-quarters of a U.S. dollar.
Though my cross border shopping has taken a hit, it may be time to regroup and look at some strategies to make the weakening dollar work for you. Even if the loonie has reduced your buying power, it doesn't have to be all bad news.
Thousands of Canadians took advantage of the U.S. housing crash a few years ago and got a great deal when they purchased a home or condominium south of the border. Whether it was for personal use or as an investment, the falling loonie may mean this is the time to cash in on a potentially large profits.
The U.S. housing market bottomed out in the beginning of 2012 with a decline of more than 35 per cent from the highs established in 2006. At the same time, the Canadian dollar was trending close to or above par with the U.S. dollar. If you bought during the housing downturn, you got a great deal on your property. Now that the Canadian dollar has dropped by almost 25 per cent and the overall U.S. housing market has rebounded by 30 per cent, your U.S. property could be sitting on a huge profit.
For example, if you purchased a home in Orlando, Florida in July 2011 for $100,000 USD (approximately $95,530 CAD using the Bank of Canada's exchange rate at the time), it has now appreciated in value by 59.2 per cent according to the Orlando Regional REALTOR Association. This means that your house is now valued at $159,200 USD ($204,811 CAD using the Bank of Canada's exchange rate), so you have essentially doubled your money in four years. Not a bad investment for wanting a place where you could escape some of the Canadian winter.
Before you start spending your profits, the taxman will want his share, and in this case, both the Internal Revenue Service (IRS) and Canada Revenue Agency (CRA) will want to know about your profits and to tax you accordingly. Fortunately, the U.S.-Canada Tax Treaty means you are not subject to double taxation. However, when you consider that most or all of your profits will be taxed as capital gains (which is a lower rate than regular income), you should still be left with a tidy sum to bolster your bank balance or investment plan.
Before you stick the for sale sign up on your U.S. property, you should make sure you understand all the tax implications and how it can affect your U.S. -Canada taxes. Though the low dollar may mean a big profit when you sell, you need to make sure you follow the rules and don't create tax headaches at filing time.
Under the Foreign Investment in Real Property Tax Act (FIRPTA) rules of 1980, the U.S. requires that 10 per cent of the gross selling price of real property be withheld in federal taxes when it is sold by a person who is neither a U.S. citizen, nor a green card holder, nor a resident of the U.S. Depending on the state your home is in, it may also have a required withholding, though not all states do. Generally, most or all of the tax withheld by various U.S. sources can be recouped, but not until the following year when a tax return is filed.
You can reduce or waive the withholding by completing additional paperwork with the IRS after getting a signed contract prior to finalizing the sale. But you need to understand the process, work with the title company to make the needed calculation of gain and complete the forms in the right timeframe to have them accepted.
A U.S. tax return must still be filed for the year of sale to report the final numbers and any taxes owed paid or you receive a tax refund for an overpayment.
Cashing out your profits of your U.S. property may be the right investment decision for you, but make sure you consult a financial professional before you sell. If you are planning to use your U.S. property as a retirement home for part of the year, you may not be in a selling mood.
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