August 3, 2000

Tips on buying property in Canada

By TOM KELLY
The Real Estate Advisor

If you fell in love with Banff, the pristine waters of Lake Louise or can't wait to get back to Whistler to play another round of golf in one of North America's most scenic valleys, pay close attention to the financing before buying that dream getaway.

The interest-rate structure could be as different as the locale, and the pricing may not be as relaxing as your recent vacation.

Many folks "from the states" are drawn to Canadian property during the summer months for a variety 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 $1.47 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 brain power, research the capital-gains ramifications if you expect to execute a tax-deferred exchange. You may be able to rent the getaway -- especially if it's in a popular location such as Whistler where snow skiers can be seen on the mountain-top glacier nearly 12 months a year.

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.

Many investment advisors say that folks looking to purchase property abroad - for investment or a principal residence - often refinance or take out a home-equity loan on a property in the U.S. and pay cash for the "offshore" home. That way, all financing questions are eliminated and the interest on the home-equity loan or refinance often is tax deductible.

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:

• Manufactured homes are improved and so is financing, 07-27-2000
• New wrinkle in reverse mortgages, 07-20-2000
• Referrals offer risks, rewards, 07-13-2000
• Vacation is no time for worrying about escrow, 07-06-2000
• AIRD will mean big changes for appraisers, 06-29-2000
• Rules vary on renting your cabin, 06-22-2000
• Credit: You really are just a number, 06-15-2000
• Reverse mortgages have come full circle, 06-08-2000