Canada. More about the next great (?) investment opportunity

Many of Smokey's friends are looking for good opportunities to invest outside of the US. Recently some parts of Canada are showing up on the radar screen. Rising energy prices are making some of Canada's oil reserves financially recoverable. The "Tar Sands" at Lake Athabaska have been recently been touted as "the answer" to America's independance on foreign oil, although they haven't proven to be so in the past half-century or so.

Forget about the fact that Canada is a sovereign nation (so I guess it qualifies as foreign), there are other energy issues as well.

There are also real estate opportunities in Canada as well. Of course there are issues that a savvy investor should be aware of before jumping in with both feet.

Financing is one of them

Americans can borrow from Canadian banks and vice versa. But trying to finance Canadian property with U.S. funds becomes difficult. Location, security in the property and ability to enforce simply make the package unattractive to most U.S. lenders.

And, if you do choose to buy and borrow Canadian, don't expect to see the loan options available here. The interest-rate structure could be as different as the locale, and the pricing may not be as favorable as you might expect. Owner financing, or "carrying the paper," is also available.

Many folks "from the states" are drawn to Canadian property during the summer months for a variety of reasons, but the big bargains brought by a favorable exchange rate are not as big as they once were. A U.S. buck can now bring approximately $1.18 in Canadian goods, down significantly from years past.

Most Canadian conventional loans are written with a 5-year term. There are some 7- and 10-year options available but the most popular loans right now are 6-month, 1-year, 3-year and 5-year loans (comparable to our adjustables and known as "open"), each typically amortized over a period of 25 years.

"Open" does not mean the borrower's monthly payments adjust as the monthly market fluctuates; it means the borrower can prepay the loan at any time. Borrowers pay more for an open loan. Fixed-rate loan rules only allow for prepayment once a year. When a loan reaches its term, the lender usually renews it.

Shorter loan terms encourage borrowers to consider paying off loans as soon as possible, giving the consumer more of a stake in the property. This accelerated equity makes more sense to Canadians than it does to U.S. taxpayers because Canadians are not able to deduct home-loan interest from their taxes. For some American consumers, the mortgage-interest deduction is the only major write-off available.

Americans face two large issues when investing in real estate abroad. First, you have the appreciation or depreciation of the real estate itself – or the "property side" of the decision. You then have the currency risk when you sell the property and bring the money back into this country. If the Canadian dollar slides, you run the risk of losing money on that investment. However, if the Canadian dollar improves against the U.S. dollar, your investment suddenly rises significantly.

Also, research the capital-gains ramifications if you expect to execute a tax-deferred exchange. You may be able to rent the getaway – especially if it's in a popular location such as Vancouver Island or Whistler, B.C., but the U.S. tax-deferred exchange rules do not qualify when trading for properties in other countries.

With investment property in the United States, you can defer your capital gain if you buy a "like kind" property of equal or greater value than the one you sold, provided you identify it within 45 days and purchase it within 180 days from the day you sold the first property. The Internal Revenue Service says any property outside of this country is not "like kind" so no capital-gains taxes can be deferred.

Many investment advisors say that folks looking to purchase property abroad – for investment or a principal residence – often refinance or take out a home-equity loan on a property in the U.S. and pay cash for the "offshore" home. That way, all financing questions are eliminated and the interest on the home-equity loan or refinance often is tax deductible.

Smokey will be talking about entity structuring and how you can use it to your advantage when doing cross-border investments in a little while.

Bye for now.