Have you ever considered buying a vacation property? A few of my colleagues own one – some have a cabin in the mountains a few hours from home, while others own property in the southern United States that is a 3 hour flight from home.
I have always wondered just how much these properties cost and how much they actually use them. Are they really worth the cost given the (potential) issues that could come up?
Related: Property Tax Comparison
Purchase Price & Financing
The biggest cost any vacation property is obviously the purchase price. If you don’t have the full purchase price in cash, you’ll need financing which is more complicated than a principal residence because lenders see them as higher risk.
If you’re a Canadian buying a property in the United States, you may need to seek out an American lender, which further complicates matters.
The bottom line is that financing a vacation property is more complicated than a principal residence and would be a huge factor in whether I wanted to buy one in the future.
The further your vacation property is from home, the more important it is to have a plan to maintain the property. If it is only a couple hours driving distance you can easily do some of the work yourself.
But what if you live in Toronto and you own a property in Arizona? You’d have to worry about finding someone to handle basic tasks like yard maintenance, collecting the mail, dealing with tenants (if it’s being rented out while unoccupied) and everything else that comes with owning a home.
Vacation properties that are a significant distance from home don’t really give peace of mind for the owner. In some American cities with depressed prices, crime rates are high and if the property is far away, it makes checking up on things that much more complicated.
Peace of Mind
Luckily, our rental property is less than 10 minutes driving distance from our current home.
But I would be weary of buying a property far away from home because I wouldn’t be able to check up on it regularly.
What if a rain storm causes leaks in the basement? What if crime soars in the area and it gets broken into? What if a neighbor’s house catches on fire and causes damage?
These are all issues that have me convinced buying a vacation property isn’t worth it – no matter how cheap it is.
Along with the initial purchase price, the ongoing costs of a vacation property vary and depend on the type of property and where it is located.
Yard maintenance, cleaning, insurance, utilities, strata fees for condos and dock fees (lakeside) are all costs to be considered. Property management companies are available to pay for the maintenance but they can charge hundreds of dollars per month.
If you are renting out the property the costs could be recovered but this brings with it a whole other set of issues – receiving income in the United States would require a state tax return to be filed, capital gains are treated differently and estate taxes would need to be considered.
Personally, I couldn’t justify the costs associated with a second property unless I was there for several months of the year.
Canadians who buy vacation properties in the United States to rent out should count on having extra costs to complete their tax returns.
US tax rules state that Canadians who own vacation (rental) properties in the US must file a US tax return, claiming any income earned while the property is rented out. A foreign tax credit is then claimed on the Canadian tax return for the US taxes paid.
US taxes can be paid on the gross rental income or net rental income (after deducting all relevant expenses like utilities, maintenance etc). If you choose to pay taxes on the gross rental income, you’ll need to pay a 30% US withholding tax on the gross amount.
Related: How to Fix Tax Return Errors
Even if you don’t rent out your vacation home, you’ll still need to file a US tax return when it is sold. There could be a capital gain from the sale that would mean US taxes owing when it is sold.
Final thoughts: buying a vacation property can be tempting for Canadians who notice the depressed real estate prices in the United States, but they can also be expensive. Ongoing costs related to the property would make me feel obligated to visit it often – which in itself could get expensive.
Perhaps I should ask my coworkers whether they are happy with their vacation properties, but I’m pretty sure it’s just not for me.
Do you own a vacation property? If so how has your experience been?