Double whammy hits foreign homebuyers

Tax, currency rules can sour investment upon sale

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Dec. 8, 2010

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Tax, currency rules can sour investment upon sale

Tom Kelly
Inman News™

It's the time of year when families dream about skiing and wonderful places for holiday reunions.

Nearly 20 years ago, when some very popular Canadian resorts were growing like crazy, the Canadian dollar was dropping lower against some of the world's currencies.

American investors and recreational buyers found real estate bargains in Canada simply because of the strength of the U.S. dollar. Other U.S. homebuyers, especially cash-strapped seniors seeking less expensive health care and medicines, sold their primary residence, took significant sums of home equity (thanks to a run-up in appreciation), moved north of the border and became full-time residents.

A good example of the second-home situation occurred in Whistler, Canada, the popular resort up the Sea to Sky Highway from Vancouver and the site for downhill skiing of the 2010 Olympics. The region had gained in popularity ever since 1991 when it became the first mountain resort outside of the U.S. to be named No. 1 by a major American ski magazine.

In another example on the other side of the country, New Englanders who long coveted summer homes in waterfront regions of Nova Scotia and New Brunswick also took advantage of the dollar difference and made more purchases.

On Jan. 21, 2002, the Canadian dollar fell to an all-time low of 62 cents against the U.S. dollar. U.S. consumers, especially skiers, continued to descend upon Whistler and other popular Canadian destinations in droves to swoop up slope-side condominiums and chalets. Many potential buyers decided not to purchase, fearing that the Canadian dollar would drop even more, making their investment worth less.

Since then, things have changed. In 2007, the Canadian dollar was trading higher than the U.S. dollar for the first time in 30 years. The two currencies were about even on Thanksgiving 2010.

The swing in the Canadian dollar serves as a helpful reminder to investors, recreational owners and retirees considering an international purchase. You can make or lose money when you eventually sell -- depending upon when you choose to purchase or sell.

Americans face two major 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.

So, that little getaway on the other side of the world may look terrific and the exchange rate definitely favorable. But what will your money look like when it comes time to "repatriate"?

Last week, I spoke with a friend who purchased a Whistler condominium in 2001 because of the strength of the dollar, the buzz of the upcoming Olympics and his love of downhill skiing. While he still enjoyed the Whistler area and the improvements made with Olympics dollars, the economy had taken its toll on his income and liquid assets.

The unit still was a great rental. Since the Olympics, the area has attracted even more international families, especially from Japan, Germany and Switzerland. However, my friend no longer had the luxury of allowing significant equity to be tied up in an investment home. He needed the cash to pay household bills and school tuitions.

Not only had his condominium, near Blackcomb Mountain and walking distance to Whistler Village, appreciated in value, but he also benefited from the increase in the Canadian dollar. He will face a significant capital gains tax, but needs the cash out of the condo to make ends meet.

"If I had not needed the cash," my friend said, "I would have kept the condo or done a tax-deferred exchange."

The tax-deferred exchange would have raised some red flags. With investment property in the U.S., taxpayers can defer capital gains taxes if they buy a "like kind" property of equal or greater value than the one they sold, provided it is identified within 45 days and purchased within 180 days from the day the first property was sold.

The Internal Revenue Service says any property outside of this country is not "like kind" so no capital gains taxes can be deferred.

If you are buying or selling abroad, make sure you understand all tax and currency ramifications. It's best to know going in rather than being surprised coming out.

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