Buyer beware: Things to keep in mind when choosing a home inspector

TORONTO — Today, in all but two Canadian provinces, virtually anyone can call themselves a home inspector — regardless of whether or not they have completed any sort of professional training.

Here are a few things for homebuyers to bear in mind when choosing an inspector:

Most provinces don’t regulate the industry

Only British Columbia and Alberta currently have legislation in place requiring home inspectors to be licensed, while Ontario says it’s planning to introduce regulations this year.

While there are myriad designations out there that home inspectors can obtain, the educational requirements to obtain those designations can vary widely, even in B.C. Where inspectors are licensed.

Experts recommend doing some research to determine what the various designations mean — and what sort of training is required to obtain them.

Word of mouth is key

Real estate lawyer Mark Weisleder recommends getting a referral from a friend or family member that you trust — rather than from one of the real estate agents that stands to benefit from the sale.

Inspectors who get referral business from real estate agents could be hesitant to point out the flaws in a home so as not to risk that business, Weisleder says.

“If a home inspector becomes known for finding too many problems with a house, it’s very possible they may not get too many referrals from realtors,” he says.

Insurance matters

Some, but not all, inspectors carry errors and omissions insurance, which can protect the buyer if the inspector is negligent.

Experts recommend asking to see the home inspector’s proof of insurance.

Keep limitations in mind

Home inspectors base their opinions on what they can readily see within the home.

An inspector cannot see through walls or underneath floors.

As such, there are some issues that could slip under the radar of even a highly experienced and well-trained inspector.

Experts say it’s important to keep that in mind when deciding whether or not to purchase a home.


Canada: Navigating The Potential Pitfalls Of U.S. Property Ownership

Canada: Navigating The Potential Pitfalls Of U.S. Property Ownership

Article by Laura Gibbs

With the decline in the real estate market in the United States following the 2008 financial crisis, many Canadian residents have taken advantage of investing in U.S. real estate for income generation and/or personal vacation homes. This was especially advantageous for Canadians between 2010 and 2013, when the Canadian dollar was close in value to the U.S. dollar.

Many Canadian resident taxpayers fail to realize that the acquisition of U.S. property may result in income tax and other information reporting requirements in both Canada and the U.S. Further, if the property generates rental income, that income may be determined and treated differently in Canada and the U.S.


Canadian capital cost allowance vs. U.S. depreciation

Since the purchase of capital property (in this case, the land and building of a rental unit) may not be “written off” in the year it is purchased, the cost must be capitalized and depreciated over time. The method and rate of depreciation differ between the two countries such that significantly different results may be reached both on an annual basis and when the property is sold.

In Canada, a rental loss is often fully deductible, whereas in many cases a rental loss realized in the U.S. will not be deductible against other sources of income. The inability to claim these rental losses in the U.S. when incurred is partially mitigated by having these suspended losses applied against any gain realized on the sale of the property.

Additionally, tax depreciation in Canada is discretionary and may not be used to create or increase a rental loss, whereas depreciation is mandatory in the U.S and, if not claimed, it will be deemed to have been claimed. This treatment results in a reduction of the cost of the property for U.S. tax purposes without a corresponding deduction for the depreciation claimed. When the property is sold, the gain recognized will be higher due to the depreciation claims without a corresponding increase in the suspended losses to apply against it.

Limitation on certain expenses

While most deductible rental expenses are claimable on both Canadian and U.S. tax returns, certain expenditures are subject to different rules in the U.S.

Repairs and maintenance

The Internal Revenue Service (IRS) issued guidance, known as the tangible property regulations (effective January 1, 2014), to clarify whether certain materials, supplies and repairs and maintenance were deductible or whether capitalization was necessary. Under these regulations, items that would be eligible to be expensed in Canada might be required to be capitalized in the U.S. unless the taxpayer is eligible for certain exceptions, two of the most common being those for small expenditures and small taxpayers.

There are additional exceptions and other determinations for capitalization that should be discussed with your Collins Barrow advisor.

Mortgage interest and property taxes

If your [D1] U.S. rental property is also a vacation home (defined as a property that is used personally for the greater of 14 days or 10 per cent of the total days it was rented to others in the tax year), the expenses incurred should be allocated proportionately by dividing the number of days the property was rented by the number of days the property was used (rented and personally).

In contrast, mortgage interest and property taxes are calculated by dividing the number of rental days by the number of days in the year, often resulting in a deductible portion that is less than in Canada.


Information reporting

If you paid a U.S. person at least USD $600 in connection with your U.S. rental property, you may be required to file Form 1099-MISC with the Internal Revenue Service. The form must be filed for each person to whom you have paid at least $600 for services (including parts and materials) in connection with the property. The payments must have been made by payment other than credit card to an unincorporated entity.

For example, suppose you hire a landscaper to mow the lawn of your U.S. rental property, and you pay this self-employed individual in cash more than $600 during the year. You will be required to file Form 1099-MISC to report the amounts paid to the landscaper and you will need to obtain the landscaper’s U.S. Social Security Number for reporting purposes.

The due date for filing this form with the IRS for the 2015 tax year is February 29, 2016, or March 31, 2016 if filing electronically. The due date for the filing of these forms in connection with the 2016 taxation year will be January 31, 2017.

In Canada, ownership of revenue-generating property in the U.S. is subject to reporting on form T1135 if your share of the cost of the property (when added to the cost of all other reportable foreign property) is CAD $100,000 or more.

Selling your U.S. real property

With the recent decline in the Canadian dollar against the U.S. dollar, many Canadians are selling or thinking of selling their U.S. properties (rental or otherwise). The U.S. dollar proceeds, when converted to Canadian funds, may be higher due to changes in the foreign exchange rate, even though they may be selling for less in U.S. dollars.

For example, suppose you purchased U.S. property for $400,000 in 2012 when the average exchange rate was 1.00. Your cost for both Canadian and U.S. purposes is, therefore, $400,000. If the property is sold for USD $350,000 on, say, December 31, 2015, when the exchange rate was 1.384, the Canadian equivalent of the proceeds is $484,400. In the U.S. you realize an economic loss of $50,000 and pay no tax. In Canada, however, you actually have a capital gain of $84,400 with no foreign tax credits to offset the Canadian tax that may be payable.

Further implications for nonresident aliens

Tax filings

If you acquire a property in the U.S. as a nonresident alien and the property is used to generate rental income, you will likely be required to file a U.S. Nonresident Alien Income Tax Return (US1040NR), and possibly a state income tax return, to report these rental activities.

Generally, rental income earned in the U.S. will be subject to a 30 per cent withholding based on the gross rents collected unless an election to have the income treated as “effectively connected” with a U.S. trade or business is made. This election should be made with the first income tax return filed, and will permit any income arising to be taxed on a net basis (net of expenses) at graduated rates.

In order to file, you will need to obtain a U.S. Individual Taxpayer Identification Number (ITIN). This application often is made with the first federal income tax return filed.

Tax withholdings on disposition

There are also withholding requirements for non-U.S. persons on the disposition of real property under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). Unless certain exceptions are met, the Act requires the purchaser to withhold 15 per cent of the proceeds and remit them to the IRS (prior to February 16, 2016, the withholding tax rate was 10 per cent). The withholding may be claimed on your U.S. tax return when you report the disposition.

An application to reduce or eliminate the amount of tax withheld may be made by filing Form 8288-B within certain time constraints. Additionally, many states (e.g. Hawaii) have similar withholding requirements on the disposition of real property. Many of these states have provisions reducing the amount to be withheld, similar to those under FIRPTA.

For more information on FIRPTA, please refer to the Collins Barrow U.S. Tax Alert “U.S. Real Estate Issues,” and contact your Collins Barrow advisor.

Long-term stays in the United States

In June 2013, the Senate passed the JOLT (Jobs Originated through Launching Travel) Act of 2013, which essentially permits Canadian retirees to stay in the U.S. for up to 240 days without a travel visa. Previously, the limitation was 182 days.

What does this have to do with taxes?

If you spend more than 182 days in the U.S. in any one year, the U.S. will likely consider you a resident for tax purposes and therefore subject to U.S. income tax on your worldwide income unless relief is granted under the Canada–U.S. Tax Treaty.  State filing requirements may also exist.

This consideration may also result in other U.S. filing obligations, including the requirement to file FinCEN Form 114 “Foreign Bank Account Reporting” (FBAR), which carries a penalty of $10,000 for each account not reported in a timely manner. Generally, no treaty relief is available should these obligations arise.

Additionally, if you are outside your province of residence for an extended period, entitlement to certain provincial health coverages may be affected.

The U.S. determination of residency is not limited to 183 days in the current year. An additional “substantial presence” test may apply should you spend a significant amount of time in the U.S. each year. If you are considered a resident under this test, you may be required to file Form 8840, Closer Connection Exception Statement. Please refer to the Collins Barrow U.S. Tax Alert “Snowbirds and the Closer Connection Exception” for more information on the substantial presence test and Form 8840.

These are just a few of the complexities Canadians face when owning U.S. real property.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Mortgage rules and winter weather won’t chill home buyers

New, tighter mortgage rules didn’t stop 13 rival bidders from submitting offers for a semi-detached house in central Toronto on Tuesday. The Family Day holiday, a record cold snap and a snowstorm didn’t seem to slow them down either.

Industry watchers are waiting to see if the action in Canada’s most frantic real estate markets will ease off a bit now that the federal government’s new rules surrounding mortgage insurance have come into effect.

The semi-detached house on Davenport Road near Christie Street was listed with an asking price of $599,900, which means it falls into the segment of the market affected by the new rules.

Real estate agent Geoffrey Grace of ReMax Hallmark Realty Ltd. reports that the house had about 130 showings. Another 60 groups passed through the weekend open houses.

The five-bedroom house is currently divided into flats and has three kitchens. New owners could keep it as an investment property or tear out some of the kitchens to restore it to use as a single-family home.

Either way, the number of people vying for it suggests that buyers aren’t ready to pause yet.

January was unusually busy for the first month of the year. El Nino likely played a part as milder-than-normal temperatures wafted across much of the country.

But real estate agents have also reported that some house hunters – especially those in the pricey markets of Toronto and Vancouver – were particularly motivated to edge out other buyers in January as they attempted to clamber into the market before the new down-payment regulations took effect.

Numbers from the Canadian Real Estate Association show that the average sale price in Canada jumped 17 per cent in January from a year earlier.

Once again, the Greater Toronto Area and Lower Mainland of British Columbia pushed up the national numbers even as Calgary, Edmonton and B.C.’s Okanagan region were in decline.

CREA president Pauline Aunger said the organization had expected buyers of single family houses to bring forward their purchases in an effort to get into the market before tightened mortgage regulations took effect this week.

Sales across the country jumped 8 per cent in January compared with the same month in 2015. In the GTA, sales rose 7.3 per cent from a year earlier, in Greater Vancouver, 32.1 per cent, and in B.C.’s Fraser Valley, 58.1 per cent.

January sales likely would have been even higher in the GTA and Vancouver area if more listings were available, Ms. Aunger says.

The Toronto Real Estate Board reported this month that the average selling price in the GTA swelled 14.1 per cent in January compared with January, 2015.

Under the federal government’s new rules, the minimum down payment for new insured mortgages rises to 10 per cent from 5 per cent for the portion of the house priced above $500,000. The 5-per-cent minimum for properties up to $500,000 remains unchanged.

Ottawa had already restricted mortgage insurance to homes valued at less than $1-million, and the new regulations leave the minimum down payment for more expensive homes unchanged at 20 per cent.

For those reasons, the rule change affects only a slice of the market but, in Toronto, it’s the segment where many first-time buyers land.

Rick DeClute of DeClute Real Estate Inc. is seeing some pockets of Scarborough swell in popularity as house hunters continue their migration from the core.

Small bungalows that sold for $489,000 just a year or so ago now command more than $600,000, he says. Popular neighbourhoods include Clairlea, Wexford and Maryvale. “They’re just exploding,” he says of the value increases.

Streets running off of Birchmount Road between St. Clair Avenue and Lawrence Avenue provide wide lots that are highly sought-after, he says. “People are looking for a little bit of space and something they can work with.”

In many cases, small houses can be topped up or extended, he says. Some builders are buying a small house on a 70-foot-wide lot, for example, then tearing it down and putting up two houses.

New mortgage insurance rules come into effect

New mortgage insurance rules come into effect Staff

Homebuyers shopping for houses costing more than $500,000 face new rules starting today that are meant to cool the country’s hottest housing markets.

The new regulations increase the minimum down payment for homes with a selling price over $500,000.

The move is expected to take pressure off the Canada Mortgage and Housing Corporation, which offers mortgage loan insurance to homebuyers making a down payment of less than 20 per cent.

The minimum down payment for such government-backed insured mortgages will increase from five to 10 per cent for the portion of the house price above $500,000. The minimum down payment on the first $500,000 of the home’s price will remain at five per cent.

Homes costing more than $1 million are not affected by the changes, as they already require a 20 per cent down payment. Homes selling for less than $500,000 are not affected either.

The changes mean, for example, that a $700,000 home will now require a minimum down payment of $45,000, up from $35,000. That $45,000 would consist of a five per cent down payment equalling $25,000 for the first $500,000 of the home, added to $20,000, which is the 10 per cent on the remaining $200,000 value.

Finance Minister Bill Morneau announced the changes back in December, saying they were designed to contain risks in the housing market, reduce taxpayer exposure and support long-term stability.

He said the new rules would specifically target Toronto and Vancouver’s housing markets, where “prices have been elevated.” He said the idea was to protect people buying houses to ensure they have sufficient equity in their home.

At the time, some economists said the changes would likely have only a small effect, since only about a quarter of Canadian homebuyers put a down payment of less than 10 per cent on their homes.

First-time buyers in big cities are most likely to be affected, since those selling homes they already own in cities with hot housing markets would have likely already built up equity in those properties to be able to afford the down payments.

The federal government has introduced a series of changes in recent years aimed at tightening rules for government-insured mortgages. They have included raising the minimum down payment to five per cent; reducing the maximum amortization period to 25 from 30 years; and capping the maximum insurable house price at $1 million.

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