While it can be beneficial to some people, many investors find out too late that owning U.S. real estate is riskier than you think. Owning a vacation home in the U.S. may be a great lifestyle choice, but it doesn't necessarily follow that it is a smart investment. Even the Sunbelt has drawbacks.
Many Canadians, Europeans and British nationals escape part or all of the winter in Florida or other Southern destinations. The general belief is that price increases are inevitable and will drive the investment higher over time. The flip side of this thought process is that costs can be higher than you think. Apart from the initial cost of buying, real estate taxes and/or condo fees are a fact of life. Insurance and maintenance take another chunk as does the cost of air conditioning – a year-round expense in order to avoid mould. Ongoing construction of new condos compete against decades-old units making it harder to sell. When it finally comes time to sell, you’ll pay a hefty real estate commission.
In the end, if you do make any money on the sale, you will be responsible for capital gains taxes. In the US, there is no tax-free capital gain like Canadians would enjoy on their home.
Many snowbirds do make significant gains by buying real estate and hanging in for decades, however investing in U.S. real estate from outside the U.S. entails more work than you might think. It’s not as simple as buying a stock on your local stock exchange.
It is smart to have foreign exposure in the U.S. within your investment portfolio, but for most investors, stocks are smarter than real estate. You must keep in mind that tax rules add further cost.
Contact A. A. Ali, CPA CA for a no-nonsense conversation about investing in the U.S. from Canada, the UK or the EU.