1. WHAT YOU NEED TO KNOW WHEN
BUYING ARIZONA REAL ESTATE
Commonly Asked Questions from our Canadian Clients
www.Canadians2Arizona.com
The Carvalho Real Estate Group
Office: 480-854-9000
Toll Free: 866-286-6162
Email: Info@Canadians2Arizona.com

2. TABLE OF CONTENTS
Introduction ........................................................................... 2
Getting Started ....................................................................... 3
Financing the Purchase .............................................................. 4
Selecting a Property ................................................................. 6
Conducting the Search............................................................... 10
Fees and Costs Associated with the Purchase of Real Estate ................. 11
Fees and Costs Associated with Owning Real Estate ........................... 12
Risks of Purchase ..................................................................... 13
Property Management ............................................................... 14
Renting Your Property ............................................................... 15
Tax Implications ...................................................................... 16
U.S. Tax Return ....................................................................... 17
Capital Gains Taxes Upon Sale ..................................................... 17
FIRPTA .................................................................................. 18
Rental Property ....................................................................... 20
Minimizing Tax Exposure ............................................................ 21
Conclusion ............................................................................. 21
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3. Introduction
There are many questions to be answered when considering the purchase of real
estate in another country. Pricing, property taxes and property management can all
be potential barriers to purchase if you are not aware of the facts within a market,
the resources available, and the steps and potential pitfalls in the acquisition process.
Don’t let this lack of information stop you from closely examining the opportunities
available in the U.S. market at this time, and specifically in the metropolitan
Phoenix, Arizona. This fact-based paper will address your questions and provide you
with thorough, informative answers. And, our team is a prepared, educated and
conscientious group of professionals ready to answer any further questions and assist
you throughout this process.
How often and how much property can I buy?
There are no time constraints or dollar amounts that dictate what you can buy and
when or how you can buy it. Arizona and the U.S. have very favorable policies towards
foreign nationals investing in U.S. real estate. Of course, the Internal Revenue
Service, or IRS, the equivalent of the CRA, wants a piece of any profit you may realize
on the purchase and sale of your U.S. real estate, as do most countries.
Why should I buy in Arizona versus Florida or California? Are people investing in
Arizona from other countries, too?
In addition, as most potential buyers are well aware, there are good values
throughout the entire U.S. right now. There is significant interest from countries all
over the world where their currency is strong against the American dollar, specifically
Western European countries such as Great Britain and France. “Sunbelt” states
throughout the lower half of the U.S. are especially attractive to buyers due to their
temperate weather. A couple of distinct advantages that Arizona has over the Florida
and California markets are lower average prices, and the big one, much lower taxes.
Arizona has by far the lowest tax rate on the purchase, carry, and sale of real estate
assets. Additionally, California, and especially Florida have extremely high
homeowner’s insurance rates when compared to Arizona.
Where are the best deals?
There are exceptional deals all over the metropolitan Phoenix market right now. The
biggest price decreases have been in the outlying areas of Phoenix like Maricopa,
Queen Creek, Buckeye, Surprise, and Anthem. We've experienced price drops as high
as 50% in those areas. Each submarket is different, but most areas have lost at least
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4. 25% of value, on upwards to 50%. There is no shortage of smart purchases in every
part of the city. It just depends what you're looking for in terms of location and
amenities. These values are contributing to what many analysts are calling the
“perfect storm” of events, making this market more attractive than ever for Canadian
buyers.
How long with the Canadian dollar stay at par?
Another major contributing factor is the strength of the Canadian dollar, or loonie, in
relation to the U.S. dollar. Nobody really knows for certain how long the Canadian
dollar will stay at par, but it certainly looks like the U.S. dollar is going to have some
problems for some time to come. The looming U.S. recession, the aggressive Fed
interest rate cuts, and the Treasury's penchant for printing more and more money do
not bode well for the strength of the U.S. dollar. This means great things for the
loonie as long as the Canadian government does not try to suppress the loonie for
international trade and other purposes.
Getting Started
How long can Canadians stay in the U.S.?
Canadians can stay in the U.S. for different periods of time based on visa status, but
most snowbirds and Canadian visitors choose to stay in the U.S. for less than 182 days
to prevent the loss of their provincial health coverage. In addition, due to the hot
summers in Arizona, most visitors choose to come sometime during the gorgeous
months of fall, winter and summer – or October through May.
What do we need to do if we want to retire and move to Arizona permanently?
Of course, Arizona is such a desirable place to live, there are some individuals that
choose to retire in the lovely state and live here year-round. If you are considering a
full time move, the time to start planning is now! If you're thinking about staying in
the U.S. full time, you are going need to get your financial house in order, and this
can be quite a lengthy and complicated process depending on your financial situation.
The myriad of decisions that you have to make can be mind boggling, especially when
it comes to trying to make the most of the hard earned assets you've worked a
lifetime to create.
We highly recommend that you consult a cross border financial planner that can help
you define, organize, and plan your transition to the U.S. A good plan will save you
tens of thousands of dollars or more, and help you protect against unforeseen tax and
estate planning issues. We are happy to refer you to our excellent partners who
specialize in cross border financial planning.
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5. What’s the difference between purchasing a home as a second home versus a
rental property?
Some buyers choose to purchase a home as a rental property rather than a second
vacation home. The two biggest differences between the two options are the loan
programs that will be available for financing, and the way the Internal Revenue
Service (IRS) will treat the property for tax purposes. A rental property will require
investment property financing, which usually carries a higher interest rate than
primary residence properties, and you may have to put additional funds down because
lenders see investment properties as a slightly riskier proposition. You are also
obligated to pay taxes on the income you receive from a rental property, whereas a
second home will probably not have any rental income, and thus no sales tax on
income.
Financing the Purchase
You can purchase a property with full cash. In fact, it makes the transaction much
simpler if you don't have to get financing.
What are the different types of mortgages I can get? Can we get a fixed rate
loan, and for how long? What banks can I work with to obtain a mortgage as a
Canadian?
If you are like most buyers, you’ll want or need to finance a portion of the purchase.
There are fixed rate and adjustable rate loans, stated income and full documentation
loans, and owner occupied, second home or investor loans. Fixed rate loans are
especially favorable when compared to Canadian fixed rate terms. You can fix your
rate for 30 years in the U.S. if you wish. 30 years or 15 years are standard fixed rate
periods. You can also obtain adjustable rate mortgages that are fixed for shorter
periods, such as 3, 5, 7, or 10 year fixed periods. Currently, there are a few banks
that are providing financing for Canadians within the U.S. – including RBC Centura,
Harris Bank, Washington Federal and Wachovia.
What are the differences between obtaining a loan in Canada versus Arizona?
The process for obtaining a mortgage in the U.S. is significantly different than the
process in Canada:
• We use title companies and escrow agents to close properties, not attorneys.
• Loans are typically amortized over 30 years in the U.S., rather than the typical
25 year period in Canada.
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6. • You can fix your interest rate for 15 or 30 years instead of 10 years.
• U.S. lenders compound simple interest annually rather than semi-annually - no
paying interest on interest.
• You can usually prepay as much as you'd like in the U.S. - just make sure you
get a mortgage without a prepayment penalty.
• You only have to put 20% down to avoid paying mortgage insurance, versus 25%.
• Closing costs are usually perceived as a bit higher in Canada than the U.S.
• In the U.S., you can use points on a loan (3 kinds - discount, origination, and
seller paid) to craft a mortgage that suits your particular circumstances better.
• The U.S. uses impound accounts to collect property taxes and insurance along
with your loan payment on a monthly basis. The lenders require this to protect
their investment in your home purchase.
Do I need a U.S. social security number or tax ID number?
In addition to the standard documentation, there are 3 tax numbers that are going to
come into play with securing financing and purchasing property:
• Canadian Social Insurance Number (SIN)
• U.S. Social Security Number (SSN)
• Individual Taxpayer Identification Number (ITIN)
You will never use your SIN for U.S. tax filing purposes because, well, that's for
Canadian taxes.
You're probably wondering what the difference is between a Social Security Number
(SSN) and an Individual Taxpayer Identification Number (ITIN). Social Security
Numbers are held only by U.S citizens, or legal residents that qualify under specific
circumstances. As a Canadian, you’ll need an ITIN to file U.S. taxes for the rental or
sale of U.S. real estate.
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7. Selecting a Property
What kind of real estate should I buy?
After identifying the best means of financing for your purchase, and therefore finding
your optimal purchase price point, it’s time to start looking for the best location and
property for your budget. When analyzing what type of real estate to buy, the choice
really depends on what your plans are for the property. Is this a holiday home for
you, or a straight investment for cash flow? Some properties are easier to manage
than others from afar, and the risk and rewards of owning different property types
will have to be evaluated for their suitability in meeting your needs.
You’ll want to consider a variety of options:
• Single family detached home
• Condo
• Townhouse
• Multi-family dwelling
• Land
What type of community should I buy in?
If you decide that you want a residential property (single family or
condo/townhouse), the type of community that you then select will really depend on
how you will be using the real estate, what amenities and lifestyle options you want,
and a variety of other factors. You will have a large selection of communities to
choose from:
• Gated versus un-gated
• Large master planned communities
• Smaller custom communities
• Townhouse/condo or single family detached
• In-town, suburban, or in the outlying areas
What are the procedural differences between buying a new build home and a
resale home?
In addition to selecting the type of community that you want, you’ll face other
choices, such as whether to buy a new build home or a resale home. Resale homes
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8. and new homes are completely different purchase types. New home builders do not
belong to the National Association of Realtors or the Arizona Association of Realtors,
so they are not bound by the same rules. New home builders also use their own
contracts, which are heavily slanted towards their interests and needs. The Arizona
Department of Real Estate Standard Purchase Contract, that all real estate agents use
for resale homes, is heavily slanted towards the buyer and their interests.
When visiting new home communities, you MUST visit the subdivision with your agent
on your first visit. You do NOT want to fill out their registration card without your
agent present for two reasons:
1. The onsite sales agent represents the builder, not you, and can swing a better deal
for the builder without you having help from a knowledgeable Realtor who knows how
to negotiate with the builder. We've seen many buyers pay tens of thousands of
dollars more for a home because the onsite sales agent told the buyer they were
getting a "special deal" that they could only get if they didn't use an agent. Those
deals are special alright! Special for the builder because the buyer would have paid
about $50,000 less if they had let us represent them! You do not lose anything by
having representation, and will NOT get a better deal without an agent. So, please
let us represent you, protect your interests, and negotiate a better deal on your
behalf.
2. The second reason new home subdivisions want you to register without an agent is
so that they don't have to pay the agent. Period. They will make a much larger
commission by not having to pay the buyer’s agent, and by taking advantage of an
unsuspecting buyer who doesn't know how to negotiate pricing with a builder.
The moral to the story is DON'T GO TO A NEW HOME SUBDIVISION WITHOUT YOUR
AGENT. IF YOU DO GO, DON'T FILL OUT A REGISTRATION CARD. You are not required
to fill out the card to see the models, even if you are asked to do so. As long as the
builder does not have a written registration card, you can have your Realtor represent
you.
All that being said, there are some phenomenal deals available from new home
builders right now, especially on spec inventory homes, and it is highly suggested that
you consider your opportunities in this part of the market.
What do I need to know about private pools versus community pools when I buy?
Another choice you’ll have to make is whether or not to have a private backyard pool,
if you are purchasing a single family home. Private pools are on your land and can
only be used by you and your guests. You are completely responsible for maintaining,
securing, insuring, and operating your pool. You should also be aware of the Arizona
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9. Swimming Pool Barrier Regulations because of the number of drowning deaths caused
by swimming pools in our state. If you are purchasing in a development that has a
community pool, it is not on your property, and can be used by everyone who lives in
the community. The pool is maintained by the Homeowner's Association (HOA). You
can enjoy the pool without having any responsibility for its care other than paying
your HOA dues, and without the liability of having it on your personal property.
In general, it is not recommended for absentee owners to have a swimming pool on
your property if you are buying it as a rental property - for liability reasons and
maintenance costs. Even though you may not be occupying the home, the pool
liability is still yours, and if your tenant doesn't maintain the pool, you could have a
swamp in your backyard. If you do have a rental property with a pool, be sure to
have a professional property manager in place that will handle all of the proper
paperwork for liability, as well as take responsibility for regular care of the pool and
its equipment.
What is the difference between a bank owned property and an REO? What does
“short sale” mean?
Finally, another major decision in the purchase process is whether or not to pursue
REO/bank owned properties (there is no difference between a bank owned property,
lender owned property or REO property) and/or short sales. A "short sale" is when the
homeowner owes more on their mortgage than what the property is currently able to
sell for in today’s real estate market, and the bank has agreed to let the owner sell it
for less than what is owed ("short" of what is owed), rather than have to go through
the time and expense of foreclosing on the property. Short sales are many times one
of the first steps in the foreclosure process. A short sale is, definitely, a better
option for the homeowner than foreclosure.
Short sales can occur for many different reasons, but typically a homeowner has taken
money out of the equity of their home to pay off bills, go on vacation, etc. in an
amount greater than what the house can sell for including closing costs, or
the homeowner has an Option ARM loan with negative amortization or interest only
loan for 100% of the home’s value. These types of loans helped create the subprime
meltdown in the U.S. this past year. The homeowner now may owe more than the
home is worth and would have to actually come up with the difference between what
is owed to the lender and the current market value of the home in order to sell.
Short sales often look very appealing to buyers shopping on the Internet because the
price is so low. They always look like a real steal! But, as with all things that look
too good to be true…they usually are not what they initially seem. There are few
important things you must know about the short sale process:
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10. 1. The price on the listing is a price the listing agent thinks is appropriate. This is NOT
a guaranteed price from the bank. This is just a real estate agent’s suggestion for a
marketable price. Some agents get it right, and some do not. Banks are not into
giving away their money any more than you or I, so if the list price was too low to
start with, the bank will counter, and that amount could be substantially higher than
what the listing agent listed the property at initially. THE BANKS DO NOT TELL
AGENTS AT WHAT PRICE TO LIST BEFOREHAND. They only negotiate after they have
an offer on paper in front of them. And, more often than not these days, listing
agents know that short sales are not a particularly desirable process, so they try to
“hide” the fact that a property is a short sale on the listing. In addition, they will
often list the property at artificially low prices in the hope of getting at least one, if
not several, offers. It is quite a game! Our agents are extremely experienced and
knowledgeable in handling this process, these properties and this “game” in general.
If you decide to pursue a short sale, you’ll want to take full advantage of our services
to protect your time and interests.
2. The single biggest surprise to many buyers is how long and frustrating the process
can be. It can take several weeks (at least!) to close on a short sale property with
very little communication from the bank about what is going on…and we’ve had deals
take up to 4-5 months to get any response at all from the bank. We've seen buyers
wait months for an answer to their original offer, and the bank then countered at a
price that was well outside of what the buyer originally wanted to pay. This adds up
to a great deal of lost time for the buyer. Many buyers become too frustrated with
the short sale process to continue on with it after having gone through the process
once. Remember, banks are large, bureaucratic institutions, and homes are just line
item assets to be liquidated. They don't really care about timelines or the emotion of
buying a home. We strongly recommend that if you have a short period of time to
research, and a limited amount of time to spend on this acquisition, then do not
waste your time with short sales. The majority of deals never work out, and it takes
months to come to that realization.
On the other hand, REO means "real estate owned" and is the acronym for real estate
properties that a bank has taken back into their possession for one reason or another,
but usually they are foreclosed homes. REO's can be MUCH easier to buy than short
sales because the bank already has possession of the property.
The bank does not need to evaluate the homeowner's circumstances or hardships and
then negotiate offers to purchase. The bank already took the home from the
homeowner, and it is now a stale asset with carrying costs that they need to liquidate
as quickly as possible.
Anytime you're buying directly from a bank you will encounter some red tape, but not
nearly as much as you do with the short sale process.
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11. Conducting the Search
How should I research properties while at home in Canada?
It can be a daunting task to purchase property from half a continent away! There are
three recommended strategies: 1) let your qualified real estate professional do the
searching with you and for you, 2) search the MLS and the internet alone, and 3) visit
Arizona and tour properties.
1) The best way to do it is to call or email your qualified real estate professional (our
team!) and share what you're looking for in a potential purchase. They’ll help you
clarify your needs and make some suggestions. Once a good understanding of what
you want is established, they can set up a custom MLS search of properties that might
work for you. All properties that match your criteria will be emailed to you, and you
can then provide feedback that will help hone in on just the right neighborhood and
property. Consistent communication through email and by phone regarding these
properties can then lead the buyer to exactly the right areas and neighborhoods for
the next steps of their search.
2) The second way to conduct a search is to go to a website such as
www.Canadians2Arizona.com and search homes on your own online. There are a
number of different MLS and new home search tools available on our website that you
can use to search all available homes. When you find some interesting options, you
can then contact us to provide further information.
3) Finally, you will want to schedule a visit so you can tour the homes that you like
online. Remember, looking at homes on the Internet is a lot like Internet dating.
Your potential mate is usually not going to look anything like they did in their picture
online! That's why it's important to visit and take a firsthand look before buying.
Usually, if buyers are dissatisfied with the properties in person, it is the neighborhood
or location that is the primary reason for their disappointment. There is little to no
way for you to gauge the surrounding area from 6 pictures of the house on the listing,
or even a virtual tour.
How long does it take to buy a home?
The research process takes a little time, but once you've found the property you
want, it could take as little as 2 weeks to close escrow and complete the deal if you
are buying full cash. If you are buying a home with bank financing from a primary
residence homeowner or a bank, it usually takes about 30-45 days to close. If you are
attempting to buy a short sale, it could take anywhere from 6-8 weeks to 4-6 months,
and honestly might never happen.
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12. What happens if the property that I want to buy gets multiple offers on it?
When you do make an offer on a property, it is possible to be one of multiple offers.
This is a real possibility, which surprises most people when it happens considering the
current state of our market. We are in a fantastic buyer's market right now
nationwide in the U.S. But, it's also important to understand that even though
Arizona home prices have fallen sharply over the past couple of years, we still have a
lot of people moving here and a fairly robust real estate market with strong
fundamentals, meaning that the great deals are not a secret, and they generally sell
pretty fast. Investors and Canadian buyers are helping to buy excess inventory in a
number of price ranges and locations, and some of these segments of the market have
actually become quite competitive in the past year.
If we get into a multiple counter offer situation, there are number of factors that will
come into play, not the least of which is the strength of the buyer. The more money
you are willing to put down, the better. Most buyers are still trying to buy homes for
5% and 10% down here in the U.S., whereas Canadians have to put at least 20% down
to qualify for financing. This makes Canadian buyers very attractive in a competitive
situation. It's up to your real estate agent to promote and sell you as the best buyer
for the property, and to make sure you win the multiple counter offer situation. Our
agents are well versed in the right questions to ask the listing agent before writing
the offer, the right way to write the most powerful and competitive offer, and the
steps needed to take to get the property!
Fees and Costs Associated with the Purchase of Real Estate
What fees can I expect to pay when buying Arizona real estate? What commission
or fee do you charge?
When you use a buyer’s agent to help you research and purchase real estate in
Arizona, it costs you nothing. Buyer's agents work for free for you, and are
compensated by sharing the listing agent's commission for bringing a good buyer to
the table. When buying a new property, the buyer’s agent is paid a commission by
the builder for bringing a strong buyer to purchase a property. (That's part of the
reason they don't want you to come with an agent.) Our team’s primary fees are paid
by these listings agents or builders at close of escrow when you purchase a property.
In addition, we do charge a small $495 transaction fee as part of your closing costs for
the service of managing your entire transaction’s closing. Not all real estate agents
will provide you with the level of assistance needed to make your closing a smooth
and simple process. The toughest work usually begins once we have a contract!
Because no attorneys are involved here, real estate agents are the ones that manage
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13. the coordination of the closing with the escrow company, inspectors, lenders, home
warranty companies, insurance companies, etc. Our team has an experienced, expert
transaction manager with years of experience as an escrow officer, as well as being a
licensed real estate agent. We will manage your escrow from start to finish, provide
you with excellent communication and customer service, vendor referrals and
anything else you need to make this acquisition easy and enjoyable.
Who pays the property transfer fees and how much are they?
You will have to pay a variety of closing costs associated with the purchase that will
generally run between 2% and 3% of the total purchase price of the property,
including our $495 transaction management fee. These are mostly lending and title
fees. This percentage also includes property transfer fees to the homeowner’s
association (HOA). In resale transactions, the transfer fees are negotiable and either
side can pay them, or they can be split. The fees are usually between $300-500, and
would be included in that estimated 2-3% of the total purchase price for costs of
acquisition. On a new home, the escrow company will impound any fees related to
the transfer of the premises to the buyer.
With a full cash purchase, the fees are greatly reduced to approximately 1%, or
usually less than 1%, of the purchase price, since there is no lender involved.
In addition, there is no sales tax in Arizona when purchasing real estate.
Fees and Costs Associated with Owning Real Estate
How much is homeowner’s insurance? How much are property taxes?
Aside from the usual maintenance and care of a property, and the cost of financing, if
one should choose to finance a portion of their purchase, the only other standard
costs associated with owning real estate are property taxes, insurance, and in most
cases, homeowner’s association dues.
Property taxes are levied based on the assessed value, not true market value. In
Maricopa County, where Phoenix is located, the assessment ratio for owner-occupied
residential property is 10 percent of market value, which is usually anywhere between
10% and 30% below true market value. So if your home is valued at $350,000, you will
be charged property tax based on the assessed value of $35,000. So how much will
your property tax be? It's difficult to say, because that depends on where you live.
Cities, schools, water districts, community colleges, bond issues -- all these factors
determine your specific tax rate, which is usually somewhere around 7-11% of the 10%
of the assessed value. The best way to estimate property taxes is to review the tax
rate for similar homes in similar neighborhoods that you like, or ask a qualified real
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14. estate professional for more detail. Property taxes are very reasonable in Arizona as
compared to other states such as California or Florida.
Homeowners insurance rates vary based on a number of underwriting factors
(including whether your property is a non owner occupied rental property or not), so
each home will be priced accordingly. It's safe to say that rates are very affordable in
Arizona, comparatively speaking. For example, a $250,000 home in Arizona would
cost about $600 a year to insure.
What liability should I be aware of with rental properties?
Liability is always an issue on a property that is not occupied full time by the owner,
whether it is a holiday home or a rental property. Anything that goes wrong on the
property is your liability. Any kind of safety or health risk or building code violation is
your responsibility. Additionally, swimming pools at rental properties are a major risk.
Although the property owner is ultimately responsible for the liability, the vast
majority of rental owners never experience any kind of liability issue. You should
properly insure your investment property to guard against any kind of claim. We
suggest you speak to a qualified insurance agent that we can put you in touch with to
obtain insurance. At the very least, you will want an umbrella policy up to
$1,000,000 to protect you, your property, and your interests.
What can I expect for homeowner’s association fees?
Finally, homeowner’s association fees also vary widely with the type of property
(townhouse, condo or single family home) and the amenities offered within the
community such as pools, gates, etc. Most fees fall somewhere between $50/month
and $150/month. Again, the best way to estimate homeowner’s association fees is to
look at the rates for similar properties in the areas in which you are interested.
Risks of Purchase
What are the risks, security, and safety concerns I should be aware of when
buying?
The level of risk depends somewhat on whether you are going to rent the property or
hold it for personal use only. Anytime you have tenants renting a property, you have
liability, so you should be sure to have adequate insurance coverage to protect you
against any kind of claim that may arise out of an accident on your property,
especially if there is a swimming pool.
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15. You should always consult a tax professional when renting a property to seek advise
on how to minimize your tax liability on your income, and also plan ahead for the day
you will sell the property so you don't get hit with a large and unexpected holding tax.
Vacant properties can sometimes have issues with break-ins if they are located in
communities that don't have adequate security, or are left without anyone to look
after them even on an intermittent basis.
You always want to keep your eyes out for any types of pests that may want to make
your holiday home their holiday home while you're gone! Periodic pest treatments
will do the trick. This isn't a huge problem, but nevertheless, it's better to be safe
than sorry.
A significant risk in the current market is trying to buy properties in communities that
are filled with foreclosed properties. This is never good for curb appeal, value
retention, or appreciation. Furthermore, the more vacant homes in a community, the
higher the risk that crime will make an entrance. You also want to be aware of
condominium and townhouse communities where the Homeowners Association may be
in financial trouble because of an excessive number of defaulting owners, causing the
HOA to be unable to maintain and service the community. These are all items that
can be properly researched ahead of time during the property acquisition process,
and our team will make sure that all due diligence is done with you to protect your
interests.
Property Management
How much are property management fees?
Many individuals will opt for property management in their absence to help combat
some of the issues that can come up when a home is vacant. Many property managers
offer limited services of oversight in an owner’s absence to make sure that the
property is cared for properly, maintained and safe. If an owner chooses to rent the
property to tenants, fees generally run 8-10% of the gross monthly rental income.
There is also usually a setup fee and possibly a lease up fee to get the property
advertised and rented. These fees usually amount to about ½ of one month’s rent on
the property. If you are not renting your property, the management services are
usually less than $100/month for a standard “home-watcher’s” service.
A good property manager is as valuable as gold and as hard to find as diamonds. It's a
low margin business when you figure, at the max, 10% of $1000/month for a standard
1500 ft., 3 bedroom, 2 bath home equals $100 a month to manage your property.
Property managers really make their money on fixing things because they charge an
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16. override fee on the services that are needed to do repairs. So, buy newer properties
that will not have a lot of deferred maintenance in order to keep you property
manager's hands out of your pocket.
Do you do property management? If not, who do you suggest?
We've found that smaller property management companies and "mom and pop" shops
tend to do the best job and give the best service. The big companies have too many
properties, and you can never get a hold of your property manager when you want to.
With a smaller company, you'll actually have a relationship, and you always have our
team to step in and help with the communications in the future as well. We have
excellent referrals for all types of required property management services.
Renting your Property
How do I rent my investment property?
Many clients will consider renting their property full time as an investment, or part
time in their absence. There are a few different ways to rent your property, and the
obvious and suggested choice is to hire a property management company. This is
strongly suggested for optimal management and results. Other options include finding
a competent real estate agent that specializes in leasing properties. You could also
try to do it yourself, but there is a long list of reasons why this is not the suggested
means of managing your property.
Can I cover my mortgage and expenses with the rent I receive? Will I have
positive cash flow?
If you’re going to rent your property on a full time or part time basis, it is important
to consider the location of your purchase and the desirability of that location to
potential tenants. Also, because summers are so hot in Arizona, it is rare to find part
time tenants that want to rent properties during the months of late May through early
October. If you’re going to rent, your qualified real estate professional can help you
break down the numbers so you have an accurate and realistic understanding of what
your likely monthly revenues and expenses will be, along with any income or negative
cash flow. Cash flow really depends on how much money you put down, how much
your monthly loan payment will be, property taxes, insurance, HOA fees, property
management and any other miscellaneous fees, as well as the purchase price and
expected rental rate of the property.
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17. Tax Implications
Whether you plan on renting your property and collecting rental income or not, you
will have tax implications from the ownership and sale of real estate in the U.S. And
although there is no sales tax upon purchase, there are several other important notes
on taxation to include in your decision making process.
What are the State, Federal and Canadian tax implications of owning and buying
U.S. real estate?
For the most part, your tax implications are going to be most apparent when you sell
the property and are taking profits, but you will also have to address annual tax
planning if you are purchasing income producing properties. Taxes will also depend on
whether you are considered a "resident alien" or a "non-resident alien."
Is there double taxation on the income or capital gains from my property?
With proper tax planning and professional advice there should never be double
taxation. The Canada-U.S Tax Treaty has many provisions built into it to protect
citizens from both countries from being taxed twice by the U.S. Internal Revenue
Service (IRS) and the Canada Revenue Agency (CRA).
There are a number of credits and deductions that can be claimed going both
directions, and you will definitely need the services of a sharp, cross border tax
planning professional to help you keep more of your hard earned funds. Remember,
what you don't know can REALLY hurt you, so get professional help. If you don't have
your own tax professionals already, please ask us for a referral. We have a team of
exceptional partners experienced in helping Canadians plan their taxes for maximum
effectiveness.
There are a myriad of tax implications at the U.S. State and Federal level and, of
course, the CRA will also have their hands in your pocket. This is such an important
question that the best and only way to answer it is to let you know that it is
imperative that you contact an experienced cross border tax planning professional or
financial advisor to help you with tax planning strategy.
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18. U.S. Tax Return
Do I have to file a U.S. tax return?
If you hold a Green Card or are considered a "resident alien" under the Substantial
Presence test, you will have to file a tax return. There are a few IRS formulas that
determine whether or not you are considered a "resident alien," and, therefore,
required to file a U.S. tax return. The numbers and rules are rather convoluted, so
you should ask your tax professional how they apply to your particular circumstances,
or go to the Internal Revenue Service website (www.irs.gov) to read up on the topic.
If you have income producing property in Arizona or anywhere else in the U.S., you're
going to have to file a U.S tax return to report your annual income from the U.S.
property.
Capital Gains Taxes Upon Sale
Are Canadians subject to capital gains taxes when they sell?
Though there are certainly tax implications on an annual basis when owning real
estate in the U.S., the largest and most significant taxes will come upon sale of the
property, and especially if you have a capital gain.
What are withholding taxes, and will I have to pay them?
Withholding tax is the mechanism for the Internal Revenue Service (IRS) to collect
taxes, but does not represent the final determination of the amount of tax owed on a
sale of the property by a Canadian investor. For property held for more than 12
months, whether by an individual or a business entity, it is taxed on its net gain from
the sale of U.S. real property at long-term capital gain rates.
Assets held by an individual for more than 12 months are taxed at a maximum rate of
15% upon disposition. Recaptured depreciation that may be a part of the net profit
upon liquidation is taxed at a rate of 25%. The amount of tax withheld offsets the
amount of tax that the Canadian investor actually owes on the sale of the property.
If an individual owns and disposes of the property within 12 months of acquiring the
property, the individual will be subject to tax at the higher ordinary income tax rates.
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19. Assets held by a corporation are taxed at rates between 15-35% upon disposition.
Currently, there is no rate differential for corporations between ordinary income and
capital gains. When it comes to determining your tax liability, you should always
consult a tax professional to help you through the process. They are worth every
dime you will pay for them.
Capital gains are considered to be the net profit after the cost of sale is deducted,
minus the cost basis plus any improvements made, minus any depreciation taken. It
looks like this:
Capital Gains = Net Profit After Cost of Sale is Deducted - Adjusted Cost Basis
Adjusted Cost Basis- (Cost of Purchase + Cost of Improvements Made) - Depreciation
Taken
The holding period for determining whether capital gain qualifies as long-term does
not begin until title passes to the property, rather than merely making an earnest
money deposit. Such considerations should be taken into account if a Canadian
investor is considering reselling the real estate shortly after acquiring it.
FIRPTA
What is FIRPTA, and how does it impact me?
If a Canadian sells real estate located in the U.S., a withholding tax of 10% of the
gross sales price is normally payable under FIRPTA (the Foreign Investment in Real
Property Tax Act of 1980). The FIRPTA tax is imposed on nonresident alien individuals
and foreign corporations. The tax withheld can be offset against the U.S. income tax
payable on any gain realized on the sale, and refunded if it exceeds the tax liability.
The 10% withholding requirement on the gross sales price applies regardless of the
sellers adjusted basis in the property.
Prior to 1981, foreign investors could sell their real estate without incurring a U.S. tax
on the gain, provided the property was not used in conducting a business in the U.S.
In 1981, however, "FIRPTA," the Foreign Investment in Real Property Tax Act of 1980,
was adopted to impose a tax on capital gains derived by foreign persons from the sale
of their U.S. property.
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20. FIRPTA imposes an income tax on the sale of what is termed a U.S. real property
interest ("USRPI"). A USRPI includes U.S. real estate owned directly by the foreign
investor, as well as, shares owned by a foreign person in a U.S. corporation that owns
substantial real estate.
To ensure collection of U.S. taxes that are due on the sale by a foreign investor,
FIRPTA also provides a withholding mechanism under which the buyer, who is the
transferee of a USRPI, is obligated to withhold 10% of the purchase price at closing,
and send it directly to the IRS instead of paying the full amount to the foreign seller.
When the withholding tax under FIRPTA is applicable, the transferee of the USRPI
must deduct and withhold 10% of the "amount realized" by the foreign seller. The
amount of the seller's gain on the sale is irrelevant. The "amount realized" is usually
the purchase price for the property and includes the cash paid to the seller, the fair
market value of other property transferred to the seller, and the outstanding amount
of any liability assumed by the transferee.
The 10% withholding tax imposed on the foreign seller of a USRPI is not the amount of
tax actually due. It is merely an advance payment toward the foreign seller's U.S.
income tax obligation arising from the sale of the property. The foreign seller must
file a U.S. income tax return for the year of the sale by the applicable filing deadline.
Such return will show the amount of gain derived from the disposition of the USRPI
and the amount of U.S. income tax due on the gain. The amount of the foreign
seller's U.S. tax obligation is determined by crediting the withholding tax against the
amount of income tax due as shown on the return.
There are two exceptions to FIRPTA’s 10% withholding requirement that may reduce
or eliminate the requirement:
Exception 1: Sales price less than U.S. $300,000
First, withholding under FIRPTA will not apply if the property is sold for less than U.S.
$300,000, and the purchaser intends to use it as a principal residence. The buyer
need not be a U.S. resident for this exception to apply, but the purchaser must have
definite plans to reside at the property for at least half of the time that the property
is in use during each of the two years following the sale. However, the gain on the
sale will still be taxable in the U.S., and a U.S. tax return must therefore be filed.
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21. Thus, if a Canadian is selling an Arizona real estate or any other U.S. real estate, for
less than U.S. $300,000 to a buyer who intends to occupy it as a principal residence,
the seller will receive the full purchase price rather than having 10% withheld by the
buyer and remitted to the IRS.
Exception 2: Withholding Certificate
The second exception allows for reduced, or eliminated withholding, where the
Canadian obtains a withholding certificate from the IRS on the basis that the expected
U.S. tax liability will be less than 10% of the sales price. The certificate will indicate
what amount of tax should be withheld by the purchaser rather than the full 10%. A
withholding certificate issued after the transfer of the property may allow the seller
to receive an early refund.
Rental Property
If you choose to rent out your U.S. real estate in your absence (if you are a
“snowbird”) or full time (as an investor), you will have additional tax implications.
Individuals who rent out their Arizona house or condo or other real estate should
beware because a withholding tax of 30% normally applies to the gross amount of any
rent paid to a resident of Canada on real estate located in the U.S. Unlike
withholding taxes on interest and dividends, this tax is not reduced by the Canada-
U.S. tax treaty.
One way for Canadians to avoid the 30% gross withholding tax is to file a U.S. tax
return and elect to pay tax on net rental income. The Canadian resident can then
receive a refund for any taxes withheld, to the extent the withholding amount
exceeds the tax payable.
If a Canadian owns U.S. rental property and incurs significant expenses (mortgage
interest, maintenance, insurance, property management, property taxes, etc.), he
may want to file a U.S. income tax return and take advantage of the net rental
income election. The amount subject to tax at the marginal rate will likely be
substantially lower than the amount subject to 30% withholding.
Election of the net rental income method applies for all future years and is generally
permanent. It may be revoked only in limited circumstances. The election applies to
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22. all individuals renting real estate in the U.S. Also note that Arizona state tax may be
payable on the rental income, if the election is made on the federal return.
The IRS sets a deadline to make the election of June 15th of the year after the rental
income was received. The U.S. tax regulations provide that if a tax return of a
foreign national is not filed within 16 months of the original due date, the IRS will
disallow all deductible expenses.
Minimizing Tax Exposure
How can I minimize the taxes I pay on my real estate rental income and/or
capital gains?
There are a number of different expenses that you should be sure to itemize that will
reduce your net rental income rental, which will, in turn, reduce your tax liability
when you file your U.S. tax return. You will want to deduct typical expenses, such as
your mortgage interest, management cost, property taxes, insurance, travel expenses
incurred while managing your property, etc. Your tax professional will be able to tell
you exactly what you can and cannot deduct to lower your tax liability, so be sure to
consult with them when filing your U.S. tax return.
Conclusion
There are exceptional deals to be found in the Arizona housing marketplace right
now, and a “perfect storm” of financial circumstances that make it possible for more
Canadians to purchase Arizona real estate than ever before. We are here to make
this process as easy as possible for you, and as enjoyable! Please consult our team
with any needs that you have, any referrals that you want for advisors and vendors,
and any questions that may emerge as you continue your fact-finding process. The
right input from the right “power team” of partners and advisors is invaluable in
today’s current real estate market.
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