The number of Canadians jumping on the U.S. real estate bandwagon is growing and in true Canadian spirit, most prefer the DIY method. The trouble is, there are a lot of assumptions Canadians make when buying U.S. real estate that can wind up being expensive mistakes. To help you avoid those costly pitfalls, I complied a list of my hard-earned wisdom that outlines the most common mistakes to avoid when buying U.S. real estate.
Mistake #1 – Exposure to Title Risks
In Canada, the title transfer process is subject to required oversight, but U.S. title transfer processes don’t have built-in mechanisms for accountability. If you’re not careful, you can lose a lot of money on a property after the fact. It’s best to use an attorney or title agent for U.S. title transfer documents but here are the 4 basic elements your title transfer should contain.
1) Property identification and description with full address;
2) A listing of all parties involved in the transaction (including the grantor and grantee). Proper full legal names should be clearly indicated on the title;
3) The title should indicate any forms of payment for ownership that have or will take place;
4) Any pending conditions, such as financing or hold against outside claims, should be clearly listed in the deed.
Mistake #2 – Lack of Asset Protection
Legal action in the U.S. is frequent and accounts for 96% of lawsuits worldwide. On average, every adult in the U.S. is involved in 4 lawsuits in their lifetime. Without proper legal protection and liability insurance, your properties and personal assets are at serious risk.
Generally speaking, creating a U.S. corporate entity may be the best way to go about securing your assets. This can provide you with the necessary legal protection in the event of a lawsuit. You can choose to register different corporate entities for different properties you own and may find it advantageous for taxation purposes as well. If you do decide to register a corporation, it is best to seek out legal counsel to get it set-up. To find the best form of limited liability, look into various entity structuring options, such as: C-Corp, LP, LLC, LLLP and maybe even a corporate entity in your domestic country.
Mistake #3 – Underestimating Cross-Border Accounting
The US federal income tax is based on a self-assessment method, which basically means that all taxpayers are responsible for determining their own personal tax responsibilities. Canadians who purchase U.S. property who do not make adequate tax payments can and will have a lien placed on their property by the IRS. Your best bet on this one is to consult an experienced tax attorney and accountant, make the necessary payments and rest easy knowing you’ve avoided taxation issues.
Mistake #4 – Self Managing a Rental Property
As a landowner, having a property manager is a crucial aspect of success. The amount of time it takes to screen tenants, discuss issues, perform maintenance tasks and so on is all-too easy to underestimate. An experienced property manager is an expert at conflict resolution, dispute prevention and U.S. landlord procedures in addition to performing regular maintenance tasks. In other words, your property needs a manager to run effectively.
Mistake #5 – Assuming Immortality
Sounds morbid, but it’s a fact of life. If you don’t want to burden your heirs with legal hassles on top of your passing, you should set your affairs in order as early as possible. Estate planning basically involves determining how your assets will be distributed to your heirs. This process usually entails an attorney and/or certified financial planner that can assist you with creating your plan for your estate.
Mistake #6 – Wrong Homeowner Insurance
Once you own property it is highly recommended that you insure it against theft, accident or any other form of damage. In most U.S. homeowner policies, casualty insurance and property insurance are combined and your house is insured either for replacement value or actual value. To make sure to you have the right policy for your property, find out what options are available to you and determine whether you want the replacement value or actual value for your house.
Mistake #7 – Saving Money on Maintenance
Owning real estate is a long-term investment. If you are purchasing a vacation home, you need to consider the cost of upkeep within your operating budget. One way to do this is simply create a maintenance account and take out a monthly deposit from rental income. This way, your property is well-maintained and you have a consistent monthly income.
Remember, when in doubt; don’t be shy to contact an expert. Money spent on expertise is money saved and money earned in the long run.