This is part of a series of stories on retirement and second home destinations in North America.
Have you been dreaming of a home in the sun while shovelling your walk for the umpteenth time?
Before you become a Canadian snowbird with a stake in U.S. real estate, here are five essential issues you should think about first:
1. Finding your southern nest
Make your first stop the Internet.
From local real estate websites to Canadian companies that find the homes for you, Internet research can give you a handle on properties and prices. (Canada's most popular snowbird states are Florida, Arizona, California, Hawaii and Texas, but you can find retirement communities just about everywhere.) When looking for a real estate agent, it's a good idea to go with someone who has been referred to you personally, if possible.
Once you have narrowed it down to three or four communities, use some vacation time to check out the properties in person, says Bill Ness, founder of 55places.com, a review site for 55+ and active adult communities across the United States.
"The Internet is great for doing research and narrowing down your options, but it doesn't tell the whole story," Mr. Ness says. "There are things when you drive around, things you might not necessarily see in photos."
Consider these questions: Do I want to be in the same place every year or would I prefer to vacation in several different places? How close is this location to an airport? Will family be coming to stay, and if so, will this home be big enough?
"With our Canadians buyers, one thing they look for is low-maintenance homes because they do spend half the year up in Canada and they want to make sure the house is taken care of, mowing the lawn, trimming the bushes," Mr. Ness says.
Once you've found a property, make sure the title on it is clear. Unless you are purchasing the property through a company that will do that work for you (such as Florida Home Finders, for example), you will need to enlist a cross-border lawyer or an escrow agent in the United States to do a title search.
2. Paying for it
A trip to your financial adviser is essential to find out how purchasing a property down south will affect your finances and your income during retirement, says Tannis Dawson, senior tax and estate planning specialist at Investors Group in Winnipeg.
"You need that plan to look at, 'Where am I now? What are my in-flows of cash, what are my out-flows?'" Ms. Dawson says. "How will this affect my long-term goals? If I'm putting more money into a U.S. property, I will have less money for investments. So will I still be on track to save the magic number that I need for retirement?' "
Take a look at financing options. If you have the cash, you can purchase property outright. Other options include getting a home equity line of credit (HELOC), refinancing your home or getting a line of credit from a Canadian bank. Although it can be difficult to get a mortgage with a U.S. bank, you do have the option of getting a mortgage through an American bank with a Canadian counterpart, such as Toronto-Dominion Bank or Bank of Montreal (which is affiliated with Harris Bank), which will take your Canadian credit history into account.
"We communicate with our U.S. partners and we assist our clients making the best decision whether to finance their home in the U.S. or do their financing here in Canada," says Laura Parsons, national media representative for BMO. (Harris Bank has branches in Illinois, Indiana, Arizona, Florida and Wisconsin.)
When considering options, ensure that purchasing the property won't make you so "house-poor" back in Canada that you can't enjoy it, Ms. Dawson says. Don't forget to factor in the cost of travelling back and forth to your property, plus insurance costs, utilities and property taxes.
"For example, the property taxes in Florida for non-residents can go up higher than residents in Florida, so it's something you need to inquire about and look into," Mr. Dawson says.
Another option is purchasing a property well in advance of retirement and then renting the property out. Remember to hire a property management company to maintain the property in your absence and factor in the withholding taxes you will need to remit to the U.S. Internal Revenue Service (30 per cent of gross rental income, unless you file a special form that will allow you to claim expenses and reduce the amount you owe). You can also claim a foreign tax credit on your Canadian tax return to avoid double taxation.
Most importantly, don't make any of these decisions on your own.
"Talk to your financial adviser to see how much it will be, how much you can afford, and the best way to finance it," Ms. Dawson says. "And make sure you have a good cross-border accountant if yours doesn't have the expertise."
3. Ownership issues
There are several different ownership options: You could own the property personally, as a trust, as a limited liability company, or a limited partnership. The options can confuse purchasers, but Brian Wruk says simpler is usually better.
"I think they should just own it outright and be done," says Mr. Wruk, a Phoenix-based financial planner at Transition Financial Advisors Group, a cross-border financial advisory firm. "Why complicate things?"
Mr. Wruk points out that many people think they will be subject to U.S. estate taxes (which can be hefty) when they die. However, the current exemption for Canadians is $5.34-million, and so unless your worldwide estate is more than that at the time of your death (or $10.68-million as a married couple), you won't be required to pay estate tax, he says.
If you think you will have a net worth of more than $5.34-million at the time of your death, consider purchasing the property as a trust, which will limit your tax exposure, says David Altro from Altro Levy, a cross-border law firm providing tax, estate planning and real estate legal services to high-net-worth individuals.
However, if you plan to lease out your purchase, another strategy might be in order, he says.
"If you are going to purchase and lease it out, you've got to be careful," Mr. Altro says. "What if the tenant slips and falls and sues you? We talk about that to clients and suggest owning it in a limited partnership, or an irrevocable trust to give you creditor protection. So if [your tenant] does slip and fall and gets a successful lawsuit for millions of dollars, they are not able to come to Canada and take away your house."
4. Are you insured?
When considering a retirement property down south, there is perhaps nothing more important than ensuring you have adequate medical care.
"Travel insurance is crucial," says Evan Rachkovsky, research and communications officer for the Canadian Snowbird Association. "Our provincial insurance does not follow us, we get a limited, scaled-down version so purchasing supplementary insurance is essential."
Take a look at what your credit card offers in terms of medical insurance, suggests Mr. Altro, and consider purchasing supplementary insurance if you don't feel sufficiently covered.
And don't forget about house insurance. "Insurance is a lot different in the U.S. than in Canada; there's termites, hurricanes, floods," Ms. Dawson says. Be sure to factor that into your budget when considering a stateside purchase.
5. A question of residency
You may think you will be able to spend six or eight months a year in your new southern dream home, but when it comes to U.S. residency laws, it's not always as simple as it might look on first glance.
The IRS states that Canadians are allowed in the United States for only 182 days a year, while the Homeland Security, Immigration and Naturalization Act sets a limit of 180 days, Mr. Altro says. Canadians who remain in the United States for more than 180 days (in a rolling 12-month period) risk being deemed unlawfully present and face a three-year travel ban. You could also be liable for U.S. taxation on your worldwide income if you go over the IRS's 182-day limit.
So you're fine if you keep your days in the U.S. to 180 a year, right? Not necessarily. You may still meet the IRS's "substantial presence" test, which is a more complicated way of calculating residency.
For the "substantial presence" test, take the number of days you were in the United States in the current year, add to that one-third of the amount of days you were there the previous year, and add that to one-sixth of your U.S. days in the year before that. If the total is less than 183 days, you haven't met the criteria for general residency. If the total is greater than 183 days, you could be considered a U.S. resident for tax purposes. (Keep in mind that if you make quick day trips over the U.S. border during the summer months for shopping, gas or weekend outings, those days count as well.) This works out to about 120 allowable days per year over a three-year period.
However, there is still a way to avoid paying U.S. taxes if you meet the "substantial presence" test. You can fill out the Form 8840 Closer Connection Exception Statement for Aliens, to assert that you have closer connections to Canada than the United States, Mr. Altro says.
"If you are in the United States for less than 120 days per year, you have no need to fill that out. But if you are there for more than 120 days and less than 180 days, it is in the client's best interest to fill it out every year."
Residency rules for Canadians may change in the future. The JOLT Act (Jobs Originated through Launching Travel) which went before U.S. Congress last fall, would extend the amount of days Canadians could stay in the United States without a visa to 240 days. But Mr. Altro says it's a bill that could be bad for Canadians.
"The problems with it are, No. 1, you could lose your Canadian health care [coverage] if you're outside the province too long. Two, you could become a U.S. taxpayer, which could also be a problem. Those things would have to be fine-tuned when it comes to the final bill that could get passed. Nobody knows if it's ever going to happen."
In the meantime?
"Don't go over the 180 days," he says.