People are emotional when it comes to vacationing in the United States. But should feelings be more important than decisions that can have serious financial implications for your wealth?
For Canadians who own property in the U.S., this is the dilemma that won't go away a year after the trade war began.
It's easy to shout “boycott” when the American president ponders Canada becoming the 51st nation, but the prospect of selling a long-term investment like a vacation property in a cooling U.S. real estate market weighs heavily on some.
Consider David Pridham, an Ottawa office leasing agent who had conflicting feelings about selling his duplex near Vero Beach, Florida.
“We bought there during the subprime crisis,” Pridham said of a 2008 purchase at a time when bankruptcies were common and prices were collapsing. “I was wondering when in my lifetime the dollar would be at the same level again.”
He couldn't say no back then, even though retirement was still years away. Pridham visited his second home with his family a few times a year but didn't bother renting it out, justifying the $21,000 annual maintenance cost by saying the property was increasing in value.
Now a recent retiree, he put his second home on the market this year, and when an offer came in that was three percent below the asking price and closed quickly, he jumped on it.
“We were willing to lower our price because the market was going in the wrong direction,” Pridham said, adding that offensive comments south of the border helped tip the scales in favor of a very practical holiday home. “We met a lot of people down here after 15 years, and it was only a 24-hour drive, with two bookings (hotel stays) along the way.”
Politics aside, Evan Rachkovsky, director of research and communications for the Canadian Snowbird Association, said practical financial issues are driving decisions today.
“I think it's much more complex. Because of hurricanes and other natural disasters, the costs are higher, especially in Florida. Plus, you're dealing with currency fluctuations. Those play a role too. It's a perfect storm,” he said, adding that more and more of his members are looking to rent.
If you're selling that second home, you've missed the peak of the market, according to Brad Case, chief residential real estate economist at Homes.com.
The latest data from Florida Realtors shows the average sales price for a condo or townhome statewide fell 5.8 percent to $305,998 compared to last year.
Case said there have been significant price increases in the Sunbelt parts of the U.S. during the COVID pandemic and that prices in the region are now weakening.
“During the COVID pandemic, many people took advantage of the opportunity to work from home,” Case said. “Demand increased tremendously, and Florida was a good example.”
Demand drove prices up, but an increase in supply has since pushed them into negative territory. Case said rents have fallen in some Sunbelt markets, but across Florida the average rental price is $1,678 a month, down 0.4 percent from a year ago, according to Apartments.com.
California real estate agent Jaimee Linder, who lived in British Columbia for decades, said some Canadians are turning to rentals.
She said a couple she works with made a conscious decision to rent. “They will reassess in a two-year period,” she said.
As in Canada, there are costs involved in buying and selling, including commissions, and an appropriate transfer tax may apply depending on the region.
According to a study by Clever Real Estate, the average real estate commission in America in 2024 was 5.57 percent, or about $20,092 to pay both agents.
In addition, buyers and sellers incur closing costs that go beyond the commission. The company said U.S. sellers nationwide pay an average of 2.72 percent in cost of a deal, in addition to commission, while the range for buyers is three to five percent.
Mark Serbinkski, a Florida-based accountant, said there are tax consequences. If you're selling a property for more than $300,000 or the buyer doesn't intend to live in the unit, you'll need to deal with the Internal Revenue Service.
In addition to a 25 percent federal withholding tax, some jurisdictions may impose state taxes. The equivalent of land transfer fees are property stamp taxes, but who pays the tax depends on the contractual arrangements and jurisdiction.
“I think it's more of a buyer's market. It's still a little weak,” said Serbinkski, who suggests Canadians can simply rent out their units, which requires filing a U.S. tax return detailing income and expenses. “If you still have taxes left (or owed), you can claim a foreign tax credit in Canada.”
A key difference is in accounting and how you depreciate the asset.
“The paperwork isn’t too burdensome,” Serbinkski said, emphasizing the importance of filing this paperwork. “The IRS isn't necessarily in the tax business; it's in the criminal business. In Canada, people are neglecting their obligation to file tax returns. In the U.S., the impact can be huge.”
The broader point is that buying or selling real estate for both your primary residence and second homes is expensive. That's why Rachkovsky said his group always advises its members to rent in a new area before buying.
The same logic applies to sales. Moving is a wealth destroyer due to transaction costs. When you're done with the United States forever, sell and forget about timing the market.
If you don't enjoy spending time in the United States today, but might come back, renting out this second home is an option to consider.
• Email: gmarr@postmedia.com