People are emotional about vacationing in the
United States
, but should feelings trump decisions that can have a serious financial impact on your wealth?
For Canadians who own property in the U.S. that is the dilemma that won’t go away, a year into the
trade war
.
It’s easy to scream “boycott” when the
American president
is musing about Canada becoming the 51st state, but the prospect of selling a long-term investment like a vacation property into a cooling
U.S. real estate market
is one that is weighing heavily on some.
Take David Pridham, an office leasing representative in Ottawa, who had conflicting feelings about selling his semi-detached home near Vero Beach, Florida.
“We bought down there during the subprime crisis,” said Pridham, about a 2008 purchase during a period when bankruptcies were common, and prices plunged. “I asked myself when in my lifetime the dollar is going to be at par again.”
He couldn’t say no back then, even though
retirement
was years away. Pridham would visit his second home a few times a year with his family, but didn’t bother to rent it out, justifying the US$21,000 in annual carrying costs because the property was appreciating.
Now a new retiree, he put his second home on the market this year, and when an offer came in, three per cent less than the asking price, with a quick close, he jumped on it.
“We were ready to lower our price because the market was going in the wrong direction,” said Pridham, adding that offensive comments south of the border helped tip the balance against a vacation home that was very convenient. “We got to know a lot of people down here after 15 years, and it was just a 24-hour drive, booking two (overnight hotel stays) along the way.”
Aside from politics, Evan Rachkovsky, director of research and communications for the Canadian Snowbird Association, said practical financial issues are driving decisions today.
“I think it’s a lot more complex. Costs are higher, particularly in Florida, due to hurricanes and other natural disasters. You’re also dealing with currency fluctuation. Those all play a part as well. It’s a perfect storm,” he said, adding that more of his members are looking to rent.
If you are selling that second home, you missed the peak of the market, according to Brad Case, chief residential economist with Homes.com.
The latest data from Florida Realtors shows the median sale price for condos or townhouses was down 5.8 per cent from a year ago across the state, to $305,998 as of the third quarter.
Case said the sunbelt parts of the U.S. saw significant price hikes during the COVID pandemic, and that pricing is now moderating in the region.
“During the COVID pandemic, you had a bunch of people taking advantage of the opportunity to work from home,” said Case. “There was a huge increase in demand, and Florida was a great example.”
Demand drove prices up, but a supply surge has since sent them into negative territory. Case said rents have come down in some Sunbelt markets, but across Florida, the average rental rate is US$1678 per month, down 0.4 per cent per cent from a year ago, according to Apartments.com.
California realtor Jaimee Linder, who lived in British Columbia for decades, said some Canadians are turning to renting.
She said one couple she is working with have made a conscious decision to rent. “They will reevaluate in a two-year time period,” she said.
As in Canada, there is a cost to buying and selling, including commission, and depending on the area, you may face a land transfer tax equivalent.
The average real estate commission in America was 5.57 per cent or about US$20,092 to pay both agents in 2024, according to a study by Clever Real Estate.
On top of that, buyers and sellers have closing costs beyond commission. The firm said, on a national basis, U.S. sellers average a 2.72 per cent cost on a deal, on top of commission, while the range for buyers is three to five per cent.
Mark Serbinski, a Florida-based certified public accountant, said there are tax ramifications. If you are selling a property for more than US$300,000 or the buyer does not plan to occupy the unit, there is paperwork with the Internal Revenue Service.
In addition to a 25 per cent federal withholding tax, some jurisdictions may impose state taxes. The equivalent of land transfer fees is title stamp taxes, but who pays the tax depends on what is agreed contractually and the jurisdiction.
“I think it’s a bit of a buyer’s market. It is still a little soft,” said Serbinski, who suggests Canadians can just rent out their units, which requires filing a U.S. tax return recording the income and expenses. “If there is any tax remaining (or owed), you could apply for a foreign tax credit in Canada.”
One key difference is in the accounting and how you depreciate the asset.
“None of the paperwork is all that onerous,” said Serbinski, emphasizing the importance of filing that paperwork. “The IRS is not necessarily in the tax business; they are in the penalty business. In Canada, people neglect their filing responsibilities. In the U.S., the implications can be huge.”
The broader point is that buying or selling property is expensive for both your principal residence and second homes. That’s why Rachkovsky said his group always advises members to rent before buying in a new area.
The same logic applies to selling. Moving is a wealth destroyer due to the transaction costs. If you are done with the United States forever, sell and forget about timing the market.
If you’re not thrilled about spending time in the United States today but may come back, renting out that second home is an option to consider.
• Email: gmarr@postmedia.com