How financial planning can help you build your dream retirement
Do you dream of becoming a snowbird, flying south every winter?
Owning a home in the American sunbelt is a central part of many Canadians’ retirement dreams – it’s the warm, beckoning light on the horizon.
In recent years, declining U.S. real estate prices have resulted in a wave of Canadians buying winter homes in states like Florida, Texas, Arizona, California and Hawaii. In Florida alone, Canadians spent $2.55 billion on homes between July 2013 and June 2014.1
Buying a non-principal house abroad can create many issues that financial security planning can help resolve. Your financial security advisor can help provide invaluable counsel through this process, from financing options to life insurance to estate planning. You should also consult a U.S. tax professional.
Buying a non-principal house abroad can create many issues that proper financial security planning can help resolve.Opens a new website in a new window
Things to consider when shopping for a home in the U.S.
The first step is working with your family to figure out what kind of home you want. How many bedrooms? Waterfront or desert? Condo or house? What region?
Condos offer a turnkey lifestyle, meaning you’re not responsible for general maintenance. This could save you money on professional caretakers for the months the place is empty.
Listings are online, so start surfing. Once you narrow your choices to a certain area, visit it and explore the neighbourhood. Local real estate agents will be happy to offer you a no-strings-attached tour.
If you plan to rent the property for part of the year, you may also want to meet with property managers to go over fees and other considerations. It’s also a good idea to check in with an accountant to discuss tax issues.
What to keep in mind when building a budget
When you create your budget, include all annual costs – such as property taxes, utilities, maintenance, condo fees and buying and insuring a vehicle.
Next, you may want to get quotes in writing for house insurance. Coverage may be expensive and hard to secure in areas prone to hurricanes and flooding. Also, make it clear to potential insurers if house will sit empty for several months a year. For vacant properties, some insurance policies may require weekly visits, which will be costly if you have to use a professional service.
If you plan to spend an extended amount of time there, you’ll also need to get quotes for health insurance.
Getting a mortgage in the U.S.
It’s not simple for Canadians to get a regular mortgage in the U.S., though it can be done. Keep in mind that, if you’re paying with Canadian dollars, a fluctuating exchange rate can create uncertainty.
Only eight per cent of Canadians buying in Florida opted for local financing between July 2013 and June 2014.1 If you need to borrow to buy, a flexible, reasonably priced option is to use a home equity line of credit from a Canadian lender. While this option can be a simple and effective way to borrow, it is important to work with your financial security advisor to ensure you fully understand how your home equity line of credit is working for you.
Your financial security advisor can help you create a budget and, with the help of a London Life mortgage planning specialist, assist you in determining the preferred way for you to pay for your home. You should consult a lawyer for assistance in determining how to structure the ownership. For example, if you plan to rent the property for part of the year, one option may be to structure the ownership as a limited liability partnership.
Buying and selling south of the border
The process is very similar to Canada. Generally, a U.S. lawyer is hired to do title searches and handle the transaction. In many states, the real estate services sector caters to Canadians.
As for estate planning, you’ll want to provide for disposition of the property through a will that is valid where the property is situated and consult a U.S. tax accountant with respect to taxes payable on death of the property owner.
When selling a property, Canadians or their estates will pay capital gains tax in Canada. Your financial security advisor can work with you to look at ways to effectively manage these taxes.
Mind the taxman
Canadians are currently allowed to reside in the U.S. for an average of 120 days per year over a three-year period before they may be considered a U.S. resident for tax purposes by the U.S. Internal Revenue Service (IRS).2 The maximum duration of time snowbirds can spend across the border is 182 days per year. Legislation extending this limit is currently being considered.
People living part of the year in the U.S. should file a “Form 8840 – Closer Connection Exception Statement for Aliens.” It tells the IRS that you’re a Canadian citizen and could help you avoid being considered as a U.S. resident. Consult with a tax professional who works with U.S. taxes.
Organizations that represent snowbirds strongly urge Canadians to hire a U.S. lawyer to construct separate powers of attorney and living wills. This will help prevent any hassles during a medical emergency that takes place while you’re stateside.
Canadian financial institutions offer bank accounts and credit cards in U.S. dollars that avoid high foreign exchange fees. If you have a home in the U.S., you can easily open a local bank account to use for everyday expenses and bill payments.
Buying a home in the southern sun is a big decision, and may be a key objective in your financial security plan. Or perhaps it’s a late addition to your list of things to do. Either way, your financial security advisor can play an invaluable role in helping ensure your financial independence while you make your dream a reality.
1 Profile of International Home Buyers in Florida 2014 Report, National Association of REALTORS® Opens a new website in a new window , September 2014
2 Chris Taylor, "Why Canada's snowbirds are under U.S. scrutiny," Reuters, Feb.11, 2015.