Selling Isn’t the Only Viable Option for Snowbirds With U.S. Vacation Homes

Those with empty properties in the south are facing some hard decisions.

 

Although snowbirds’ travelling plans are hard to pin down, Zoomer’s COVID-19 Impact Survey — released in September — found less than one per cent of more than 2,500 respondents said they were going ahead with their travel plans, while 39 per cent cancelled their trips and almost 30 per cent decided to defer their travel plans.

It’s not an easy decision to forgo your annual vacation, especially if you own property in the sunny south. And older Canadians own a massive number of homes, condos and time-shares in the U.S. According to the Chicago-based National Association of Realtors, Canadians purchased close to US$8 billion worth of residential property in the U.S. in 2019 (second only to the Chinese, who bought US$13.4 billion), with warm-weather destinations like Florida, California and Arizona leading the way. 

Because of the uncertainty over how long the pandemic will last — and ultimately whether life will ever return to normal — some may think about unloading their real estate.

“This decision to sell is obviously emotionally and financially driven,” says Alain Forget, a Canadian ex-pat who is head of sales and business development for RBC Bank in the U.S. Part of the motivation is that owners aren’t exactly thrilled about “paying the expensive costs of maintaining a vacation home (insurance, management fees, property tax) without being able to enjoy it.”

Selling their vacation home could trigger a number of complicated tax requirements with revenue agencies on both sides of the border. You’ll have to file a U.S. tax return on which you must report and pay capital gains tax (if you’ve made money on the sale). You will also have to remit 10 to 15 per cent of the final selling price to the IRS as a withholding tax that will be credited to you when you file your return. And you’ll have to report any capital gains from the sale on your Canadian tax return as well.

So instead of rushing to market, some savvy snowbirds are exploring another option — they’re seizing the opportunity to tap into some of their U.S. home equity. 

Because many own their vacation homes outright — and property values have appreciated greatly over the years — snowbirds have built up a huge amount of equity in their U.S.-based homes. And with interest rates so low, this home equity is relatively cheap to access and, better yet, it comes in U.S. dollars. At press time, one U.S. dollar was worth $1.32 Canadian.

By applying for a U.S. home equity line of credit or by refinancing their mortgage, snowbirds can free up cash to pay the management fees, property tax and insurance on their U.S. homes. Or they can transfer this money home and get a 30 per cent bump in the exchange to Canadian dollars and use it for their own needs, such as paying down debt or financing a major purchase.

Sunbelt real estate values have continued to hold their own, even during the pandemic, and there’s a good chance that vacation homes will continue to appreciate. “So when they do decide to sell the property down the road, they can use the appreciation to pay off any outstanding balance they owe,” Forget says.

Tapping into your U.S. home equity can be done online through a Canadian bank (if it has a U.S. branch), meaning you don’t have to leave the country.

A version of this article appeared in the Jan/Feb 2021 issue with the headline “Nest Eggs,” p. 74. 

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