Well CMHC (Canadian Mortgage & Housing Corporation) mortgage default insurance is also a protection, BUT not for you.

It protects the bank (lender), BUT YOU pay.

That’s right, you pay in order to protect the bank in the event that you default and can’t pay your mortgage.

I’ve heard so many definitions of when this CMHC insurance is required.

You must pay CMHC mortgage default insurance if your down payment is less than 20% of the purchase price of your home.

This is called a HIGH-RATIO MORTGAGE.

If you can muster up at least 20% of the purchase price of your home as a down payment, you will have what is referred to as a conventional mortgage.

In this case, CMHC mortgage default insurance is not required.

Mortgage default insurance is provided by three companies. CMHC being the largest and most commonly referred to.

• Canada Mortgage and Housing Corporation (CMHC)
• Genworth Financial
• Canada Guaranty Mortgage Insurance Company.

The premium —that is, the actual cost of CMHC mortgage default insurance, varies depending on the percentage you have as a down payment: the bigger your down payment, the lower your CMHC mortgage default insurance premium. Usually, CMHC mortgage default insurance premiums vary from 0.5% to 3% of the borrowed amount.

Mary’s down payment of $20,000 is 5% of the $400,000 purchase price.

TD thinks so…

Or at least a “moderate correction”

The average price of a resale home in Canada will fall by more than 10 per cent over the next couple of years, an analysis by TD Economics predicted Wednesday.

Calling it a “moderate correction,” the report’s authors also say sales will decline by more than 15 per cent over the same period.

“A combination of more subdued job and household income growth, rising interest rates, the recent tightening in borrowing rules for insured mortgages and fewer first time home buyers are expected to be the chief culprits behind the slowdown,” the report said.

TD economists profiled 12 urban markets across the country. They highlighted Vancouver and Toronto — currently the two most expensive housing markets in Canada — as the cities most vulnerable to a larger-than-average decline, “reflecting in part their exposure to the condominium segment, which appears particularly ripe for a correction.”

No city will experience a housing boom in the near-term, the authors say. But price drops in Regina, Saint John, N.B., Halifax, Calgary and Edmonton will be less than the average — what the report calls “a soft landing.”

On a national basis, the report’s prediction of an average 10.2 per cent price decline translates into an average resale price of $329,000 in 2013, down $38,000 from its 2011 peak.

But the red-hot Vancouver market, where the average resale home now goes for about $793,000, the authors predict a 14.8 per cent decline by 2013 to a still lofty $675,000 — a drop of $118,000.

“Vancouver has been the poster child for those individuals worried about a real estate bubble here in Canada,” the report says, with the authors pointing out that household debt levels are higher in Vancouver than in any other city.

Toronto’s forecast price drop over the same period will be almost as dramatic — an 11.7 per cent cent decline to $415,000 by 2013. That’s $55,000 lower than the current peak.

The authors note that sales are already off their peak. But they say the biggest drivers of housing demand are likely to remain “supportive” for the rest of 2011. The bulk of the price correction will come in 2012 and 2013, they say.

TD economists say the Bank of Canada is likely to start hiking interest rates again at the start of 2012.

With the central bank’s policy rate directly tied to variable rate mortgages — which 40 per cent of current mortgage holders now have — the authors point out that a $400,000 mortgage will cost $440 a month more to service by mid-2013, assuming the Bank of Canada raises its key overnight rate from the current 1.00 per cent to 3.00 per cent by that point.

I think we’ve been around this corner before.

I always come back to the same answer…

Experience shows, there isn’t always a black & white answer as it relates to specific indivuals and circumstances.

It’s good to know that our philosophy is to ensure that our clients buy responsibly and understand all the financial repercussions they’re facing. Whether that’s a Zero Down mortgage or not.

604-273-2002 or on the web

Mark Fidgett, Your Vancouver Mortgage Broker For Life

www.notapennydown.com

604-273-2002

P.S. Who’s the next person you know who needs Help with their Stuff?
Be sure to give me a call so we can help them get on that path!

As you probably know, credit is one the most important factors in the mortgage approval process.

The length of time that information must stay in your report depends on: the province or territory where you live, and the type of information

The following charts illustrates how long it takes before negative credit information is removed from your credit report by Equifax.

The unfortunate fact about the info above is the small print that says ‘from the date paid or last activity’.

As soon as you pay it, it becomes new again.

Let’s say the debt has been on your bureau for 5 years. It has a lessening effect as time goes by, BUT as soon as you pay it, it becomes NEW again and NOW stays on your bureau for another 6 years AND affects your score even more.

You may want to contact me first for a few secrets that will help you move around these roadblocks.

I can tell you one thing for sure: Having strong credit is essential in today’s world.

And I can show you how to get there.

604-273-2002 or on the web

www.notapennydown.com

As usual, make it a great day and we’ll talk to you soon.

Mark Fidgett, Your Vancouver Mortgage Broker For Life

www.notapennydown.com

604-273-2002

P.S. Who’s the next person you know who needs Help with their Stuff?
Be sure to give me a call so we can help them get on that path!

If you’re happy paying the banks more than you have to, STOP reading right here.

BUT, if you’re tired of being hoodwinked, read on -

For fun, I just called up the bank and asked them what their best 5 year rate was.

Guess what they said…

Well, our posted rate is 5.39%, but if you’re lucky, I may be able to get you in around the mid 4′s

WOW, that’s great except for the fact that I could get you in around the mid 3′s

That’s a whole 1% difference.

Do you know what that means to your bottom line?

This is a perfect example of what the banks do.

By preying on unsuspecting clients, they make a HUGE profit, and you get hoodwinked into a higher rate.

Another travesty is that 85% of mortgage clients simply sign their mortgage renewal docs and stay with their current bank.

DON’T BE AFRAID TO LEAVE YOUR BANK

There is a perception that it’s difficult to switch banks, plus it costs you money to switch.

WRONG!

Question is, do you want to pay the banks more than you have to?

You may also be interested in reading “Your Banks 6 Dirty Secrets”

Why pay the banks, more than you have to?

call me 604-273-2002

or at www.notapennydown.com

As usual, make it a great day and we’ll talk to you soon.

Mark Fidgett, Your Vancouver Mortgage Broker For Life

www.notapennydown.com

604-273-2002

P.S. Who’s the next person you know who needs Help with their Stuff?
Be sure to give me a call so we can help them get on that path!

HINT, it ain’t no PIG.

HOG is the Home Owner’s Grant Program.

It’s designed to help homeowners reduce their property taxes.

You should care because Property Taxes are due early July and if you don’t claim it, you don’t get it.

Quite often I’ll receive calls from confused home owners who didn’t claim the HOG.

Regardless of whether your bank pays the taxes on your behalf or not, it’s your responsibility to:

• complete, sign and return the home owner grant application on the back of your tax notice to City Hall by the Due Date shown on the tax notice. Do not send your grant application to your mortgage company.
• ensure your mortgage company is paying the correct amount of property taxes, minus any home owner grant amount.

Double check as some municipalities will allow you to do this online.

If you haven’t claimed your Home Owner Grant for a few years and you want to claim it all now. You’re out of luck. You can claim the grant amount only for the previous year.

In most areas of the Province the Home Owner’s Grant is $570.00.

The additional grant for home owners aged 65+ and eligible veterans and disabled home owners is $275, for up to a total of $845

To be eligible for the grant, the property owner must be:

• a Canadian citizen or landed immigrant and reside in British Columbia

• the registered owner or eligible occupant of the home located within the province living in the home as your principal residence

Call me if you have any question 604-273-2002 or at www.notapennydown.com

As usual, make it a great day and we’ll talk to you soon.

Mark Fidgett, Your Vancouver Mortgage Broker For Life

www.notapennydown.com

604-273-2002

P.S. Who’s the next person you know who needs Help with their Stuff?
Be sure to give me a call so we can help them get on that path!

How many times have you heard so-called experts preach this sort of thing?

Stop using credit, they recommend.

Just cut up your cards and adopt a cash-only policy, they say.

Well, this is terrible advice!

Don’t get me wrong, I believe in trying to be debt free.

But the truth is that if you don’t establish solid credit, you will end up throwing away money each and every month.

You may also be surprised to know, canceling your credit card can actually lower your credit score.

Most of the so-called “experts” are only guessing when they dole out advice.

After all, the credit bureaus and banks have intentionally kept people in the dark about credit scoring.

As witnessed here in my most recent recorded phone conversation.

Push play -

Did you know…

Every time you transfer a credit card balance to get a lower interest rate…
Every time you respond to a pre-approved credit card offer…
Every time you get a credit card that does not report the proper information to the credit bureaus (which happens 46% of the time)…
And every time an error pops on your credit report…

…Your credit score drops AND you will likely pay a higher interest rate on all of your loans?

Has your bank or credit card company ever mentioned any of that to you?

Of course not…

I can tell you one thing for sure: Having strong credit is essential in today’s world.

And I can show you how to get there.

604-273-2002 or on the web

at www.notapennydown.com

As usual, make it a great day and we’ll talk to you soon.

Mark Fidgett, Your Vancouver Mortgage Broker For Life

www.notapennydown.com

604-273-2002

P.S. Who’s the next person you know who needs Help with their Stuff?
Be sure to give me a call so we can help them get on that path!

You might be surprised to hear that what you get, may NOT be what you expect.

You like me, probably believe that when you pay the additional $23.95 to Equifax, you’re getting the score that lenders rely on to determine your credit worthiness.

Well apparently, THAT”S NOT THE CASE…

First some history.

Client presents to me about 3 months ago requesting a specific mortgage.

The particular mortgage program in question is designed for business owners and comes with a minimum beacon score requirement.

That being said, I didn’t want to randomly pull the clients credit without first knowing they even met the minimum credit score requirements.

As I have always advised, you can pull your score personally, as many times as you’d like, and it WILL NOT affect your score.

As such, the client specifically paid $23.95 to Equifax to see their credit score.

Their credit was too low at that time.

I sent them away with a few credit secrets to help raise their score.

They followed my advice to the tee.

They called me yesterday as happy as can be.

When they arrived at my office, they once again paid the $23.95 to Equifax to obtain their credit SCORE.

Score was 683.

BINGO, goal achieved! Or at least we thought…

Knowing that their score met the program requirements, I too pulled their score.

BUT To my surprise, the score from my end was 635.

Just to be clear, client pulls and gets a 683, I pull and get a 635.

Why SUCH a discrepancy?

I immediately called Equifax for an explanation.

I will leave it up to your interpretation.

Please push the play button below to hear the call.

Would love to hear your comments below.

Mark Fidgett
Your Vancouver Mortgage broker
604-273-2002
www.notapennydown.com
mark@notapennydown.com

Some great advice from Anne Bourne of StagingWorks, a Toronto-area home staging company.

Valuable advice for anyone about to put their home or condo up for sale. Vancouver

Mark Fidgett
Your Vancouver Mortgage broker
604-273-2002
www.notapennydown.com
mark@notapennydown.com

“Buying Real Estate in The US”

A Rare Opportunity

“It’s too good to be true.”

While this statement is usually true, it appears to not be the case when talking about the real estate investment opportunities that exist right now for Canadians in the United States. The combination of drastically reduced home prices, Canadian currency prices near an all-time high relative to the US dollar, and low financing options create what appears to be a once in a lifetime opportunity for Canadians to buy US real estate. Before we dive into the opportunities that exist, it is important to understand the genesis of these opportunities and why they exist.

1. How the Opportunity Was Created

Let’s go back in time to about 2005; the stock market was hot, the housing market was on a steady climb, and the general consensus was that housing prices would continue to steadily climb month after month, year after year with no end in sight. People of all social classes jumped on this bandwagon and became real estate investment experts overnight as they proceeded to invest purely on emotion. Without much thought, experience, or education, they refinanced their homes, maxed out their credit cards, and used all their available savings in an effort to pour as much money as possible into their real estate purchases. Credit was extended with such ease that it was difficult to resist the temptation, making real estate investing seem like child’s play.

Builders and developers could not keep up with demand and it was common for projects to sell out within days of being placed on the market. It was a bidding war; to the point where investors would commonly sell units that they had on deposit to other investors at a profit without ever taking possession. Keep in mind that these were multiple transactions on dwellings that were not even built! Housing projects were erected at such a fast pace that we had a shortage of drywall in the US and proceeded to import drywall from Asia. The good times had no end in sight, so why not jump right in?

Here was the problem: All good things do come to an end. The housing market started to level off and cool down in late 2006. At first, investors thought that the market was actually giving them a new opportunity to jump in before it continued its steady climb but in actual fact, the only thing that was ahead was several months of steady decline. Week after week, month after month, we saw a free¬fall in property values throughout much of the country. This crisis was led by states such as Florida, Arizona, and Nevada where prices were the most inflated.

Unfortunately the market turned so fast that it caught many investors by surprise. It was too late to change course for the hundreds of thousands of people who had either refinanced, or bought a second or third home or investment property to try and sell it because by this point there was already a surplus of inventory. The problem, however, was not so much the surplus inventory, but the surplus in inventory, plus the consumers’ inability to pay for their properties due to large amounts of leverage. The combination of high leverage and declining property values created a situation in which owners could not sell because their mortgages were more than the value of the properties.

To make matters worse, the subprime or second-chance loans were widely sold during the height of the market. These loans were very popular and so easy to get that people often mocked, “If you had a pulse you could qualify for a mortgage!” These loans were so bad they are now called “toxic” loans. The types of loans written included the following: 40- or 50-year loans Adjustable Rate Mortgages (ARM) Option ARM loans Negative amortization loans No document loans Interest-only loans 100 per cent+ financing loans Stated income stated assets loan No income no assets loans 80/20 loans Someone could easily write a book just on the types of subprime or second-chance loans that were available, but my point is not to educate you on the types of loans; rather to give you a better idea of the options that were available to these consumers and the ease at which they were able to borrow money. Let’s face it, when you are lending someone funds based on stated income and stated assets with no document verification, or you have to amortize the loan over 40 or 50 years so that the person can afford the payments, these are signs of trouble and it is evident that many consumers who should never have been given credit were extended credit.

Some will argue that lending institutions should have been more diligent when extending credit; others put the blame on the government for having weak oversight on these policies; and, finally, some blame the consumers themselves for being irrational and overextending themselves. Regardless of who is to blame, the important thing to keep in mind is that most people were not concerned about the type of loan they had, or the minimum payment they had to meet because everyone assumed that they would flip the property in 3, 6, or 12 months at a profit, and never actually had to deal with paying anything more than the interest on the note. What people failed to realize is that the slightest change in interest rates or the state of the economy would mean that they would be stuck with the mortgages and they could barely afford the interest let alone the principal payments. For this reason we began to see such an influx of delinquencies week after week, month after month. People could not sell their properties, and rates on their notes adjusted from interest only to principal and interest. To make matters worse, most loans had clauses that allowed lenders to add extra interest on loans if payment was received late.

By now I hope you understand how many Americans got into this mess, and will therefore appreciate the opportunity that currently exists in the distressed property market. The moral of the story is to remain rational and not to get caught up in the market hype.

2. The Three Types of Real Estate Transactions

The words “short sales” and “foreclosures” have become synonymous with “great deals.” However, there are fundamental differences between them and it’s important that you understand the differences before investing.

Caution: Remember that cheap does not always mean that it is a deal; it could be cheap for another reason. In addition, always have an exit strategy in mind when you are buying.

Generally speaking there are three types of real estate transactions:

1. Traditional sale
2. Short sale
3. Foreclosure or bank-owned property The following sections include a brief review of each transaction.

2.1 Traditional sale

The traditional sale is the type of sale that you are used to if you have ever purchased a property. It involves two parties – the buyers and the sellers. The sellers may or may not have a mortgage on their property but the important thing to understand is that the amount of the note or mortgage does not exceed the sale price of the property. In this case the sellers at their sole discretion can sell the property at a price that is convenient for them and do not need third-party or lender approval to do so, because the proceeds from the sale more than cover all expenses including the repayment of the note.

2.2 Short sale

A short sale is unique in the sense that the sellers of the property are facing financial distress. Often they are late on their mortgage payments due to any number of reasons, and they are trying to sell the house for less money than is actually owed on the note or mortgage. For example: Mr. and Mrs. Smith purchased their home at the height of the market in 2005 for $300,000. At the time they really could only afford a $200,000 home but they were lured into a five-year, interest-only loan that made them feel that they could afford a $300,000 home because of the low interest payments. They proceeded to purchase their home with 0 per cent downpayment and, therefore, owed the full $300,000 plus closing costs, for a total of about $310,000. The Smiths had opted for an Adjustable Rate Mortgage (ARM), where after five years the rate adjusted to prime plus 5 per cent.

Fast forward five years, Mr. Smith loses his job, and to make matters worse his mortgage payments tripled overnight because of the adjustment in rate. Now the family definitely can’t afford the new mortgage payments and are forced to sell their home. Unfortunately, because of market conditions and declining property values, it would be impossible for them to sell their house for the amount of the mortgage. Therefore they are selling the property for a shortfall which constitutes a short sale.

When you hear about the term “being upside down,” this is what’s being referred to. Very simplistically, a short sale is when there is a sale and the person owes more on the property than the property is worth.

You are probably wondering why this is relevant. Well, it’s important that as a buyer you understand that when you put an offer on the Smiths’ residence, for example, you are in fact facing a situation where the sale is subject to third-party approval (i.e., the lender or lenders).

Here is how a short sale works: Like a traditional sale, you would put an offer on the property that interests you and request that the selling party accept the terms or price of the sale. So far it’s the same process as a traditional sale; however, now that you placed your offer for the property, both the lender and the owners must decide whether they will allow the property to be sold at this price or not. Remember the lenders are potentially taking a large loss on this property (the difference between the outstanding mortgage and the sales price). This is the part that can be very time consuming and frustrating, if you work with a realtor who does not understand the negotiation process and all of the things that need to be provided to the bank to help it make its decision.

Now let’s twist this situation slightly and assume that two years after the property was purchased, the Smiths refinanced their home and took a second mortgage. Now both mortgagees need to agree to a payoff amount for the deal to happen since we know that there are not enough funds to cover both loans at the current purchase price. It is also important to note that both the first and second mortgage holders need to agree on a settlement before the short sale can be approved and the transaction can occur.

One more common caveat: Beware when the mortgage holder requires the sellers to sign off on a personal promissory note. The promissory note is the bank’s way of trying to recoup loses in the future (over five or ten years) for clients who did short sales. This often delays the process because the seller doing the short sale may strongly oppose the personal promissory; the point of the short sale is to wipe out all ties to the property in question. Because this is often unexpected to clients there is usually a delay in getting this promissory note signed. The clients feel that the bank may come after the sellers for the entire amount of the short sale. At that point some people will opt out of the short sale entirely simply because they are misinformed. The reasons behind why it may or may not be required are complex and not important for you to understand; however, as the buyer, it is important for you to understand that this situation may delay the process.

These are only two common reasons that short sales do take time and do require patience to get a final approval, but the time and frustration can be justified by the potential deal that one may get.

There are many realtors who think they understand this process, but few that have actually mastered it. Look for real estate professionals who have seen firsthand horror stories of clients purchasing distressed properties and can guide you through the numerous issues. Needless to say this negotiation process requires a certain skill and method to ensure a smooth transaction and thus it is important that you select a real estate professional to represent you in this purchase. Do not attempt this on your own. Certain key steps early in the process can help mitigate the time it takes to get the short sale approved.

2.3 Foreclosure or bank-owned property

In simplistic terms, a foreclosure is a property where the note bearer has forcefully evicted the inhabitants for nonpayment of their mortgages. Basically if we take the previous example with the Smith family and assume they stopped paying their mortgage, eventually they would be driven out of their home and the bank would take over the property. Since lenders are not in the business of owning property, they proceed to sell the property in an as is condition on the open market.

Bank properties are often the fastest deals to close, but have their own challenges because they are often properties that have not been lived in for a while and therefore need attention to bring them up to living standards. In some markets, approximately one-half of all resales are foreclosures. For example, in September 2010, 46 per cent of the greater Phoenix market’s single family home resales were foreclosures.

3. The Window of Opportunity

Opportunities will always exist in real estate; however, most professionals believe that the window of opportunity that currently exists may be short-lived. This is primarily because lenders are not extending credit today like they were in the past; they are being very prudent and as a result the chances of consumers defaulting on loans will be greatly minimized. One of the main reasons the US got into this mess was the so-called subprime or second-chance mortgages. I believe that we will not again see this abundance of distressed properties for a long time.

The three rules in real estate have always been and will always be: location, location, location. No matter what part of the country you are thinking of investing in, my professional opinion is that it is always worth spending a little extra when you are buying to get a desirable location. Not all bargains are good deals. As the buyer you are in the driver’s seat. There is an abundance of inventory, the Canadian dollar is near parity, and interest rates are very low. There are tremendous deals to take advantage of that are 30 to 70 per cent less, relative to the height of the market, depending on location and property type. The time to invest is now; do not let this opportunity pass you by, but remember that you can still lose money if you are not careful.

In closing, I would like to stress the importance of working with reputable real estate professionals. The professionals that you surround yourself with in making this important choice can make a world of difference. Decisions are always better made when you are well informed of the process; it never hurts to be too well informed.

Being well informed is more than finding the right property, in the right location, at the right price. You have to understand how best to take title to the property, and consider what the tax implications are when you own, when you sell, and when you die. These items and more will be covered in the following chapters.

Ways of Owning Real Estate

When buying real estate in the US there are two general ways in which title can be taken; directly by the individual(s), or indirectly through an entity such as a corporation, partnership, or trust. I further divide indirect ownership into Canadian entities and US entities.

It is important that you know and understand your options and remember that there are no one-size-fits-all solutions. It is uncommon to find a solution that has all positive and no negative attributes. You need to talk to a knowledgeable advisor to review your goals and options to determine which solution works best for your situation. This chapter discusses the most common ways to own property as well as the pros and cons of each.

Important: When deciding on the type of entity structure, always keep in mind that you want the simplest structure that will accomplish the goal. Beware that some advisors seem to make things more complicated than they need to be. Whether the reason is to look smart or to justify their fee, the bottom line is that (within reason) by keeping it as simple as you can, you save money and headaches. Of course, some complexity may be either necessary or desired; just be sure you know why the complexity is recommended. More complex situations may require entities and strategies not discussed here. In complex situations, consult with a knowledgeable advisor.

1. Direct Ownership through an Individual or Individuals

The simplest way to buy a piece of real estate is to title the property directly in your name or you and your spouse’s names. Of course, direct ownership is not limited to two people or to a husband and wife; there can be many individuals named on the title. While it is possible to name any number of individuals on a title, I would typically recommend establishing some sort of entity if you name anyone other than a spouse.

There are two main reasons for using an entity when someone other than your spouse will be an owner. The first reason is to protect your assets from lawsuits or the claims of the creditors of your co-owners. For example, if your co-owner gets a divorce, the spouse could get one-half of his or her share of the property. Other problems include bankruptcy and various judgments and lawsuits against the co-owner that could cause you to become an owner of the property with a complete stranger, or it might cause a forced sale at an inopportune time.

If you are considering naming a child as co-owner to avoid probate, nine states allow for the property to be transferred on death directly to a beneficiary without probate. This is also known as a beneficiary deed. Those nine states are Arizona, Colorado, Kansas, Missouri, Nevada, New Mexico, Arkansas, Ohio, and Wisconsin. A beneficiary deed is similar to any other beneficiary designation you use such as with your registered accounts or life insurance. The beneficiary can be changed at any time before death. If the property is held jointly, the beneficiary receives the property after the second person’s death. A beneficiary deed can be drawn up by you or an attorney. The title company will record the deed.

One thing to keep in mind is that the beneficiary can be changed anytime up to the second person’s death. While flexibility can be a good thing in most situations, you may not want to use a beneficiary deed in all situations. For example, if in a second marriage with kids from previous marriages, you may not want your surviving spouse to have the ability to change the beneficiary and exclude your children.

2. Types of Ownership

Not every state allows property ownership in all possible ways. In general, there are two types of laws under which to own property depending on the state; they are called community property law states and common-law states. Community property law states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. There are two different ways you can purchase an asset using community property laws; community property and community property with rights of survivorship. Definitions are discussed in the following sections.

2.1 Community property

In community property states only, married couples can take ownership of property as community property. In this case, they will each own a half interest in the property. Unlike joint tenants, the owners can pass their interest (half) by will or trust upon death and will not avoid probate (see section 2.3).

2.2 Community property with rights of survivorship

Certain community property states allow married couples to own property as community property with rights of survivorship. Like community property, the couple will each own a half interest in the property; however, when one person dies the survivor will automatically own the entire property and avoid probate.

2.3 Ways to purchase an asset in common-law property states

There are three ways to purchase an asset in common-law property states; a description of each is below: • Joint tenancy: The most common way for couples to own property is as joint tenants, which means that each person owns an equal share in the property. If one owner dies, the survivor will then own the entire property by right of survivorship. The surviving joint tenant receives the property automatically. This means that the property will avoid the probate process and the associated fees.

• Tenancy by the entirety: In about half of the states, married couples can own property as tenants by the entirety. Like joint tenants, this form of ownership means that the surviving spouse owns the entire property and avoids probate. The primary difference between tenancy by the entirety and joint tenancy is that joint tenants may deal with the property as they wish. If one joint tenant decides to convey his or her interest in the property, that interest can be conveyed, and the joint tenancy can be destroyed. In tenancy by the entirety, each tenant effectively owns the entire estate. Therefore, neither can deal with the property independently of the other.
• Tenancy in common: Multiple owners can be listed as tenants in common. These owners can divide their interests in unequal percentages such as 80/20. The property does not transfer automatically at death and therefore does not avoid probate.

Joint tenants with rights of survivorship or community property with rights of survivorship are the two most common ways for spouses to own property directly. In both cases the property passes automatically to the surviving spouse and avoids probate. There are some differences in the rights of spouses, so if this is a concern, please consult an attorney for the specific differences.

When possible, owning property as community property with rights of survivorship is typically preferable. The reason has to do with income taxes due at death. When a couple owns property as joints tenants and one spouse dies, that person’s cost basis in his or her half of the property gets adjusted to fair market value (FMV) at the date of death. However, couples owning property as community property with rights of survivorship will have cost basis of the entire property (100 per cent versus 50 per cent) adjusted to FMV.

Community property with rights of survivorship is typically preferable to community property without the rights of survivorship because the expenses of probate are avoided. If you recall, the difference between the two forms of community property is that with rights of survivorship, the survivor automatically owns the entire property and avoids probate. You want to avoid a multi-country probate whenever possible. Probate costs are the cost of settling your estate (mostly legal). Any assets that have to be passed to your heirs via your will are subject to probate. Take a look at the following example: John and Carol Smith bought a house for $200,000. This means that essentially they bought the house for $100,000 each. Five years later John dies when the house is worth $300,000. On the date of death they owned a property worth $150,000 to each of them and each of them had a cost basis of $100,000, giving them each a gain of $50,000.

If the house was bought with the parties as joint tenants, only John’s half would have its basis adjusted to FMV. This means that the half Carol receives from John has its cost basis adjusted from $100,000 to $150,000. Carol continues to retain her cost basis of $100,000. She now owns the entire property worth $300,000, with a cost basis of $250,000 (Carol’s $100,000 plus John’s $150,000). Carol could sell the property at this time and incur a gain of $50,000. Note: This adjustment to FMV applies only in the US.

If the house was bought as community property or as community property with rights of survivorship, both halves would be adjusted at the first death. This means that Carol would inherit the property with a $300,000 cost basis (FMV = $300,000 and basis is adjusted to FMV). This wipes out all capital gains as of John’s death. Carol could sell the property at that time and incur no capital gains.

Caution: If the property declines in value, the cost basis also declines. In the above community property example, if the property declined to $150,000 at John’s death, Carol would inherit the property with a basis of $150,000 – a loss of basis of $50,000. Whereas if they owned the property as joint tenants, the basis would be $175,000 (John’s basis is adjusted to half of the FMV and Carol retains her $100,000 basis), leaving a $25,000 capital loss that could be taken if Carol sold the property at that time.

3. Indirect Ownership Using Canadian Entities

This section explains the pros and cons of owning US real estate in three different types of Canadian entities – a corporation, a limited partnership, and a trust. The most important thing to remember is that what works in Canada may not work in the US and what works in the US may not work in Canada. Do not assume the rules are the same in both countries; typically they are not.

Note: Canadian corporations, limited partnerships, and Canadian trusts are generally not recommended entities with which to buy US real estate.

3.1 Canadian corporation

A Canadian corporation is probably the most commonly suggested way of owning US real estate. I believe this is because the use of a Canadian corporation is familiar and convenient. In addition, if the corporation is appropriate and you already have a corporation, it saves the cost of forming an additional entity to own the property. However, there are some significant reasons not to use a Canadian corporation when buying US real estate. The disadvantages are that it will cause double taxation, and generally eliminate the possibility of special capital gains tax treatment.

A Canadian corporation doing business in the US will have to file IRS Form 1120-F: US Income Tax Return of a Foreign Corporation. US tax law imposes a double tax on corporations in this way. Dividends paid to shareholders are not deductible by the corporation (first tax) and the recipients have to pay tax on the full dividend (second tax).

Note: A Canadian corporation is doing business in the US, even if the home is purchased for personal use, when it purchases real estate.

Another issue that has come up recently is that newly formed single-purpose corporations are not allowed to own real estate. If you do own an older corporation that would allow the ownership of real estate, you still need to be careful to follow the rules so that your corporation does not become a disallowed entity. This can happen if your corporation owns a home in which you live in (or otherwise receive personal benefits) and you do not pay fair market rent or take into income the value of the fair market rent. All in all, while there are some exceptions, I do not recommend buying US real estate in a Canadian corporation in most cases.

3.2 Canadian limited partnership

A Canadian limited partnership is a common way for sophisticated Canadian investors to buy real estate in Canada, but few Canadians own limited partnerships. While a Canadian limited partnership could work when buying US real estate, there are some reasons I would not suggest their use, especially if you don’t already have one.

If you are doing business in the US it is better to have an entity in the state in which you own the property in case legal issues arise. It would be better to have an attorney and an entity in the state in which the dispute arises rather than try to have a Canadian attorney hire local attorneys and learn local laws.

Another matter that arises occasionally is the confusion or even outright refusal to work with a foreign entity by some institutions; not because of some sort of prejudice, but because of fear of the unknown. Rather than learn the differences in the rules when dealing with a foreign entity, they take the path of least resistance and refuse to work with the foreign entity.

3.3 Canadian inter vivos trusts

A Canadian trust is the least popular way for a Canadian to buy real estate in the US. The only reason someone would consider using a Canadian trust is to avoid US nonresident estate tax. However, there are good reasons for not using a trust, and they are higher tax rates and a deemed sale every 21 years. A deemed sale means that the property in the trust is treated as if it were (deemed) sold at fair market value (FMV). The resulting gain or loss is reported on the trust tax return. To make matters worse, if the assets are not actually sold, the gain is taxed at ordinary income tax rates and does not receive the benefit of the favorable capital gains tax rate (currently one-half the ordinary tax rate).

4. Indirect Ownership Using US Entities

This section explains the pros and cons of owning US real estate through some of the most common types of US entities – a Limited Liability Company, a corporation, a revocable living trust, a limited liability partnership, and a limited liability limited partnership. Do not assume the rules are the same in both Canada and the US; typically they are not.

4.1 Limited Liability Company (LLC)

A Limited Liability Company (LLC) is commonly used by Americans to purchase real estate and is often, but incorrectly, recommended to Canadians when they are buying real estate in the US. The fundamental problem with Canadians using LLCs is that the US and Canada treat the LLC differently.

An LLC is a hybrid entity, meaning that in the US it can be treated as a partnership, a corporation, or if there is only a single member (i.e., partner), as no entity at all, which is referred to as a disregarded entity.

Canada treats the income from an LLC similar to that of a Canadian corporation. Canada will tax only the distributions from the LLC, whereas the US will tax the net income regardless of whether or not distributions were made. This can result in a mismatch in the timing of foreign taxes and could therefore create a situation in which the same income is taxed twice.

As a member of an LLC, you will be required to file a US Return of Partnership Income (Form 1065) and an individual Nonresident Alien Income Tax Return (Form 1040NR). You may also be required to file separate state income tax returns.

Caution: An LLC is the worst way for a Canadian to purchase US real estate. If you have already used an LLC to purchase US real estate, consult a cross-border tax professional about the best way to correct the situation.

4.2 US Corporation

There are two types of corporations in the US: the general corporation known as a C corporation and the small-business corporation, known as an S corporation. S corporations do not allow foreign shareholders, therefore I will only be referring to C corporations.

A US corporation can be used in certain limited situations, but in general should be avoided when buying US real estate. Unlike in Canada, there are very few good reasons for having a US corporation for any business except for the very largest; the reason is double taxation. Money earned in a corporation is taxed at the corporate level because there is no deduction for dividends paid, and there is also tax at the individual level. There is no dividend credit similar to that provided in Canada; the income is simply taxed twice. Another reason to avoid a corporation is the loss of the favorable capital gains tax rate when the gain occurs within a corporation. A US corporation is, in my opinion, the second worst way in which Canadians can buy real estate in the US.

As a shareholder of a US corporation, you will be required to file a US Corporation Income Tax Return (Form 1120). You may also be required to file separate state income tax returns.

4.3 Revocable living trust

A revocable living trust (or simply living trust) can be used and can provide a number of benefits in the right circumstances. The circumstances in which the living trust is best is where you are buying a second home with a value of $750,000 USD or more. If there will be any business activity such as rental, then a different entity should be considered to help protect you from personal liability. The reason for the $750,000 minimum is simply a cost-benefit analysis.

One thing you are trying to avoid with the living trust is the cost of probate. Probate fees are the cost of settling your estate. Any assets that have to be passed to your heirs via your will may be subject to probate. A living trust allows the assets to pass directly to your heirs and avoid your will and therefore probate. You have to weigh the cost of establishing the trust versus the cost of probate. In most states, probate cannot be easily avoided by other means, so a living trust is a viable solution. However, as I mentioned in section 1., when talking about direct ownership, nine states allow real estate to be transferred on death directly to the beneficiary (beneficiary deed). In those states, a trust is not needed to avoid probate, if the beneficiary deed is used.

If a living trust seems appropriate and you are considering its use, then I recommend that you look into the Cross Border TrustSM offered by cross-border attorney David Altro. He wrote the book Owning US Property – The Canadian Way. In his book, Altro describes the many benefits of the Cross Border Trust.

The Cross Border Trust does not require additional tax forms to be filed. You will file a Canadian Simplified Individual Tax Return (Form T1), and an individual Nonresident Alien Income Tax Return (Form 1040NR) in the US when the property is sold.

4.4 Limited Liability Partnership (LLP) and Limited Liability Limited Partnership (LLLP)

A Limited Liability Partnership (LLP) is the entity I recommend for couples buying US real estate that will be turned into rentals. I believe the LLP provides the best combination of ease of use, tax benefits, and liability protection available in any one entity. An LLP is essentially a general partnership that provides limited liability to the partners.

A Limited Liability Limited Partnership (LLLP) is a limited partnership that provides limited liability to the general partner. I recommend this when either additional liability protection is needed or if you are investing with partners who are not your spouse, or the other half of any legally recognized couple in Canada. An LLLP would be used with people you are going into business with, that do not already have a legal right to your assets.

As a member of an LLP or LLLP, you will be required to file a Return of Partnership Income (Form 1065) and an individual Nonresident Alien Income Tax Return (Form 1040NR) in the US. You may also be required to file a separate state income tax return. Any tax you pay with your 1040NR can be used as a credit against your Canadian income tax.

Note: The preferred way of owning rental property in the US for couples is an LLP, and for non legally recognized couples the LLLP is preferred.

Excerpted from Buying Real Estate in the US: The Concise Guide for Canadians copyright © 2011 International Self-Counsel Press Ltd.

You may be surprised to hear that you can make all of your mortgage interest tax deductible in Canada!

The wealthy people in this country have been deducting their mortgage interest for years to reduce their tax bills and the reason why you may not be deducting your mortgage interest to save tax is simply because you either don’t know about it or you think it’s not legal.

Well, let me repeat again…

You CAN make your mortgage interest tax deductible in Canada! It is perfectly legal and I can make that happen for you.

Great example from the Globe & Mail

I’ve taken money out of my line of credit to invest in stocks. The stocks I’m currently in, however, do not pay a dividend. Can I still deduct the interest I’ve been paying on my loan when I file my taxes? -K.W.

It depends.

According to the Canada Revenue Agency, interest on money borrowed for investment purposes is tax deductible “generally only as long as you use it to try to earn investment income, including interest and dividends.”

But there’s a lot of wiggle room here. Even if the company pays no dividends now, you can still deduct the interest if there is a “reasonable expectation” of receiving dividends down the road. For example, if a company says it will reinvest its cash flow for the foreseeable future and will only pay a dividend when operational circumstances permit or when it believes shareholders can make better use of the cash, the interest is tax deductible.

On the other hand, if a company has an explicit policy of not paying dividends now or in the future, interest would not be tax deductible. “Each situation must be dealt with on the basis of the particular facts involved,” the CRA says. For more information, contact the Canada Revenue Agency or do a Google search for CRA bulletin IT-533, titled “Interest Deductibility and Related Issues.”

Take a look at these benefits:

• Reduce Taxes
• Get Huge Refund Checks
• Pay off Your Mortgage Faster
• Retire Wealthy

This creative, legal financial strategy will generate free annual tax refunds for many years into the future for any Canadian who has a mortgage.

If you have interest to pay anyway, why not at least convert it to interest that gives you generous, free, gratis, no charge, tax paid gifts each year?

Click here to complete my online application form to make your mortgage tax deductible!

The tax refund cheques come every year, they are free, there is no tax on them and it is perfectly legal.

These are not small tax refunds. Your mortgage payments for a year total a huge number. As much as 70% or 80% of that huge number is the interest you are paying the bank. 80% of a huge number is also a huge number.

Let’s say it’s $10,000 for our Mr. Joe. Joe likes tax deductions. Every year he buys a $10,000 RRSP. (He has to first earn an extra $20,000 for the year so he can give up half to all the governments who want their taxes, leaving him $10,000 to buy his RRSP).

So Joe buys his $10,000 RRSP and claims a $10,000 tax deduction when he submits his income tax return. A few weeks later, Joe gets a lovely cheque from the taxman for $4,000 being 40% of the tax deduction he claimed. That’s a 40% return on his “investment” which is excellent performance.

What Joe doesn’t know is that in his annual mortgage payment is another $10,000 tax deduction, which is free for arranging. And he doesn’t have to go and earn another $20,000 before tax to get it.

Learn how easy and inexpensive it is to convert an expense he is already paying, his mortgage interest, into a tax deduction that will yield equivalent benefits to what he would receive if he bought an RRSP.

If you have a mortgage you could have the same advantages as Joe. It’s totally up to you. You can ignore it and continue wasting your money or you can make it tax deductible and retire wealthy.

The choice is yours, do nothing or….

Click here to request more info

Mark Fidgett, Your Vancouver Mortgage Broker For Life

www.notapennydown.com

604-273-2002

P.S.  Who’s the next person you know who would like to make their mortgage interest tax deductible in Canada? Be sure to give me a call so we can help them get on that   path!