homeWelcome, sign in or click here to subscribe.login
     


 

 

Real Estate


print  email to a friend  reprints add to mydjc  
Tom Kelly
Tom Kelly
The Real Estate Adviser

September 13, 1996

BUYING ABROAD: LOOK BEFORE YOU LEAP

  • Consider both appreciation and currency

    • BY TOM KELLY
    The Real Estate Advisor

    If you fell in love with Lake Louise or can't wait to get back down to Scottsdale to play another round of golf under guaranteed sun, The Recreational Real Estate Expo may be worth the trip to Bellevue.

    The two-day event, scheduled for 10 a.m.-6 p.m. Sept. 21-22 at the Red Lion Hotel, will feature developers and owners of all types of recreational property.

    "I hadn't even considered doing a show like this at all," said expo director Terry Tremaine. "But the Puget Sound area attracted so many people to the Vancouver Real Estate Expo that we decided to come down here."

    In addition to the booths and displays provided by various developers, the expo will feature seminar speakers addressing second-home finance, vacant-land financing and tax implications of recreational property.

    "There will be many condominums featured, but none of them will be timeshares," Tremaine said. "All of the properties with be full-ownership. Our main target is the baby boomers whose back pockets aren't too bad. Many of these people will be looking at retirement in 10-15 years and may want a ski chalet at Whistler for sun or a golf course condo in Arizona when it's raining here."

    Many folks "from the states" are drawn to Canadian property for a number of reasons but do your research before signing on the bottom line. A big plus in the past few years has been the dipping of the Canadian dollar. A U.S. buck can bring $1.37 in Canadian goods, a strong incentive for Americans with cash who like to visit or invest north of the border.

    Americans can borrow from Canadian banks and vice versa. But trying to finance Canadian property with U.S. funds becomes difficult. Location, security in the property and ability to enforce simply make the package unattractive to most U.S. lenders.

    And, if you do choose to buy and borrow Canadian, don't expect to see the loan options available here. Most Canadian conventional loans are written with a 5-year term. There are some 7- and 10-year options available but the most popular loans right now are 6-month, 1-year, 3-year and 5-year loans (comparable to our adjustables and known as "open"), each typically amortized over a period of 25 years.

    "Open" does not mean the borrower's monthly payments adjust as the monthly market fluctuates, it means the borrower can prepay the loan at any time. Borrowers pay more for an open loan. Fixed-rate loan rules only allow for prepayment once a year. When a loan reaches its term, the lender usually renews it.

    Shorter loan terms encourage borrowers to consider paying off loans as soon as possible, giving the consumer more of a stake in the property. This accelerated equity makes more sense to Canadians than it does to U.S. taxpayers because Canadians are not able to deduct home-loan interest from their taxes. For some American consumers, the mortgage-interest deduction is the only major write-off available.

    Americans face two large issues when investing in real estate abroad. First, you have the appreciation or depreciation of the real estate itself -- or the "property side" of the decision. You then have the currency risk when you sell the property and bring the money back into this country. If the Canadian dollar slides further, you run the risk of losing money on that investment. However, if the Canadian dollar improves against the U.S. dollar, your investment suddenly rises significantly.

    Before those Canadian dollar signs in your eyes block your brainpower, research the capital-gains ramifications. According to the accounting firm of Ernst & Young, you can defer your gain on your principal residence if you purchase abroad, as long as you do so within 24 months of the sale of your first home and buy a home of equal or greater value.

    The 1034 Section of the tax code -- commonly known as the "Rollover Replacement Rule" does not impose a citizenship or residency requirement. Therefore, you don't have to live in the U.S. and then buy again in the U.S. to defer the gain."

    However, the rules change when it comes to rental or investment property. With investment property here, you can defer your capital gain if you buy a "like kind" property of equal or greater value than the one you sold, provided you identify it within 45 days and purchase it within 180 days from the day you sold the first property. The Internal Revenue Service says any property outside of this county is not "like kind" so no capital-gains taxes can be deferred.

    So, that little log getaway in Whistler make look terrific and the exchange rate is definitely favorable. But what will your money look like when it comes time to "repatriate"?



    Previous columns:


    
    Email or user name:
    Password:
     
    Forgot password? Click here.