My_question_is: Both

question: Greetings Dave, 

I've been a customer for the past three years now (since I moved down to the US from Canada). I'm at the point where I'm looking into purchasing a home and was wondering what would it be more beneficial to buy a home in the US or back in Canada? I'm currently on an H1B (wife on H4) and currently waiting for my PD to be current. 

The question(s) are:

1. If buying a home in XXXXXXXXXXXXX, what tax benefits are there with this? For example, would I be able to get some of the proverbial Obama money (re: First Time Homeboy Credit - Form 5405), even though I'm on an H1B? Am I not considered a resident for tax purposes with the substantial presence test (I live all year in the United States)? Are there property taxes and mortgage interest tax credits?

2. if living in the United States, but I decide to purchase a home in Canada (for investment purposes), what are the benefits/cons of doing this? (Aside from upsetting my wife because I'd be buying a home in Canada for my parents while my wife and I live in an apartment). 

For example, would I be able to leverage interest paid on a Canadian mortgage as a tax credit in the US? Are there permanent residency issues with CRA if I do this? 

Looking forward to some high level guidance. Since I'll be doing my taxes with you again this year; if this requires a more detailed discussion then we can consult then. 

Thanks Dave and keep up the excellent work with the shows. 

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david ingram replies:

1.  The question of tax benefits depends upon how much property interest and taxes and State taxes you pay.

For instance in 2008, your itemized deductions were $10,623 and the standard deduction was $10.900 so we only changed the standard.

The $1,200 paid to us had to be over $3,600 to be claimable because of a 2% drop off for miscellaneous tax deductions.

Charitable deductions of over $300 would have added to the deductions.

So if you were to buy a $300,000 house in XXXXXXXXXXX with $5,000 of property tax and $10,000 of interest, it would affect your return by over $5,500 in tax -- in other words, instead of paying the feds $446, you would get a  $4,500 refund and your refund from XXXXXXXXXX would have been another $500 or so.

Providing you have an offer in by May 1, 2010 and  close the deal by July 1, 2010, you should be eligible for the Obama Money.

Be cautious however.  In my opinion, that XXXXXXXXXX house is going to go down another 10 to 15% before it goes up because of the ARM problem developing.  The ARM problem should be bigger than the sub-prime mortgage problem although since many have already been knocked out by  the  last  two years  anyway.

ARM stands for Adjustable Rate mortgage.  There are millions of  homeowners with mortgages written at 2% which are coming up for renewal at 5 to 7%.  That will more than double their mortgage payments and most people will just not be able to cope as with the sub-prime mess. (see the chart I have included later),

2.   If you were in Saudi, Kuwait, the Bahamas, Turks and Caicos or any other tax free country without a valid tax treaty with Canada, I would  tell you not to buy a house in Canada for your parents.

However, Article IV of the US Canada Income Tax Convention prevents you from being taxed by Canada as a resident.

If you want to buy a property in Canada in which your parents live you will have two methods of dealing with it.

If you are renting it to them and it is below fair market value, then you do not get a rental loss in either country but you do have to do a rental schedule in each country,.

You can deduct the interest and property taxes for your second home in Canada or the US or Mexico or Portugal and any other of the 265 other countries in the world if you do not rent it out.

You have a very delicate balance between keeping your wife happy and looking after your parents and satisfying the CRA and IRS.

We will really need to have a serious consultation if you do decide to do something with your parents.  If you rent it you will also have to fill in Canadian form NR6 before doing so.

The following explains the ARM problem from Credit Suisse.
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If the graph does not come through, you can find it at

http://www.irvinehousingblog.com/wp-content/uploads/2007/10/monthly-mortgage-resets.jpg
 

   By Monica Gutschi 
   Of DOW JONES NEWSWIRES 
 

TORONTO (Dow Jones)--Prospective homebuyers in Canada will now face a more stringent affordability test under new Finance Ministry rules. Existing homeowners who need to refinance their mortgages in the next few years would do well to follow suit.

"The best piece of advice I could give is that if your mortgage is coming up in next 24 months, you need to sit down with a mortgage specialist and you need to look at your situation," says John Turner, director of mortgages for Bank of Montreal (BMO). With the Bank of Canada widely expected to raise record-low interest rates sometime this summer, mortgage holders should start to consider "what are the things they need to do as interest rates move," he said.

Among the changes unveiled by Finance Minister Jim Flaherty to cool Canada's housing market was a requirement to stress-test all variable-rate mortgages on a five-year fixed rate to ensure the borrower can handle higher payments.

Although the monthly payments would be based on the much lower variable rate, a lender must ensure that a borrower's household budget can absorb the higher payment that a fixed-rate mortgage would imply. Canada's Bank Act requires that a household's gross mortgage debt-servicing costs (principal, interest and taxes) remain below 32% of monthly income. Total debt-servicing costs (including lines of credit, credit cards and any other consumer debt) can't exceed 40-42% of income.

As most variable-rate mortgages in Canada are now stress-tested on three-year rates, Eric Lascelles at TD Securities estimated the change is likely to add an average of C$2,500 in annual mortgage costs, or slightly more than C$200 a month, based on the average house price of C$337,000.

"Effectively, the minimum household income cut-off for Canadian mortgage applicants is now about C$5,000-C$8,000 higher than it was previously," Lascelles said in a research note.

The change will "squeeze some customers out of the market," Turner agrees. He notes the bank's current three-year fixed rate is 4.15%, while the five-year rate is 5.39%, a difference of 124 basis points. Variable rates are now around 2%-2.5%.

Canadian homeowners should "realize that rates are at all-time lows," said Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals, which supports the housing rule changes. While the vast majority of homeowners hold a fixed-rate mortgage, about 40% of new mortgages issued in the past year have been at a variable rate precisely because of the record level. "People should realize what their own personal financial situation is" and know the features of their mortgage, he said.

Stress-testing "is always a good thing," Murphy said.

And variable-rate mortgage holders may still face further challenges, Lascelles noted. "Floating rates are, by their very nature, more volatile than fixed rates," he wrote, adding that as rates rise, "it is likely that variable interest rates will eventually be outright higher than the current fixed rates being used as a test."

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