Cash-out refinance for Canadians on Florida property: timing, LTV ceilings, and tax mechanics

Section 01What a cash-out refinance actually is

A cash-out refinance replaces an existing mortgage (or, for a free-and-clear property, creates a first mortgage) with a new larger loan, with the difference paid to the borrower at closing. The mechanics are identical for a foreign-national borrower as for a US resident: an appraisal sets the property value, the lender calculates the maximum new loan against an LTV ceiling, the existing loan (if any) is paid off, closing costs come out of the proceeds, and the residual is wired to the borrower's account.

What changes for a Canadian is the program. A foreign-national cash-out refinance is almost always a non-QM portfolio loan, not a Fannie Mae or Freddie Mac product. That distinction governs everything downstream: LTV ceilings are tighter, seasoning rules are set by the lender rather than by an agency, rates are higher, and the borrower has fewer competing offers to negotiate against.

Section 02When a cash-out refinance is the right tool

The cash-out refinance is one of three Florida-equity-extraction tools available to a Canadian. The right choice depends on what the Canadian is trying to accomplish.

The first scenario is restoration of leverage after a defensive cash purchase. A Canadian who bought cash to win a multi-offer or to close on a non-warrantable condo did so for the speed and certainty of the cash bid, not because they preferred 100% equity in the property. Six to twelve months after closing, the cash-out refinance converts that equity back to USD debt at then-current foreign-national rates. The result is the same economic position as a 30% down purchase from day one, plus whatever rate movement happened in the interim.

The second scenario is US estate tax mitigation. A non-resident Canadian's US-situs property above USD 60,000 is exposed to US federal estate tax at rates up to 40%, subject to the pro-rata exemption under Article XXIX-B of the Canada-US Treaty. A non-recourse mortgage on the property reduces the gross taxable estate dollar for dollar. For a Canadian over 65 with a USD 800,000 free-and-clear Florida property, a 65% LTV cash-out refinance moves USD 520,000 off the taxable-estate base, potentially saving six figures in US estate tax at a future date.

The third scenario is reinvestment of equity into another USD-denominated asset. A Canadian with a long-held Florida property whose value has compounded above the purchase price can extract that equity to fund a second Florida purchase, a US-listed REIT portfolio, or a US-based business interest, without triggering FIRPTA withholding (which applies only on actual sale, not refinance) and without converting back to CAD.

The fourth scenario, less common but worth naming, is reduction of FX concentration in the property. A Canadian who paid cash for a Florida property has full FX exposure to the asset. A cash-out refinance that wires the proceeds into a USD account, held against future USD obligations (US tax bills, US tuition, US travel), reduces the net FX concentration without forcing a CAD-side transaction.

The cash-out refinance is generally the wrong tool when the proceeds will be parked in a low-yield account, when the Canadian wants the funds in CAD (in which case a Canadian HELOC against a Canadian property is usually cheaper), when the property has substantially appreciated and the Canadian's marginal tax position makes a sale (with FIRPTA management) more efficient than a refinance, or when the Canadian's age and worldwide net worth make the US estate tax saving immaterial.

Section 03Comparison: cash-out refinance vs Canadian HELOC vs sale

The HELOC is cheaper and faster but does not reduce US estate tax exposure and does not deliver USD. The sale eliminates everything but triggers FIRPTA, the Canadian capital gain inclusion, and the loss of the property. The cash-out refinance keeps the asset, reduces estate tax, and delivers USD, at the cost of US-rate debt service.

Section 04US tax consequences of the cash-out refinance

The US tax treatment of a cash-out refinance for a non-resident depends on whether the property is rented and what the proceeds are used for. The two questions are independent.

Property is rented and § 871(d) election is in effect

Mortgage interest on the new loan is deductible on Form 1040-NR Schedule E, but only to the extent the loan is "acquisition debt" (debt used to acquire or improve the rental property). Cash-out proceeds used for purposes other than the rental property may produce non-deductible interest, allocated under the IRS interest tracing rules.

The practical implication is that a Canadian using a cash-out refinance to extract equity for personal use must accept that the interest on the extracted portion is not deductible on the US side, even though the loan is secured by the rental property. The deductible-interest fraction needs to be tracked from year to year and adjusted as principal is paid down.

Property is rented and § 871(d) election is NOT in effect

Default rules apply: rental income is FDAP, taxed at 30% on gross with no deductions. Mortgage interest is not deductible at all. The cash-out refinance produces no US tax shelter, only debt service. This is the worst-case configuration and almost always indicates that the § 871(d) election should be made (it can be filed retroactively under specified conditions, with reasonable-cause documentation).

Property is a personal residence (no rental)

There is no US-source income to offset, so mortgage interest is not deductible on the US side regardless of the use of proceeds. The non-resident has no Schedule A itemized-deduction position equivalent to the US-resident home mortgage interest deduction, because the rules conditioning that deduction require the property to be the borrower's qualified residence under US tax-residency rules, which a non-resident by definition does not satisfy.

Section 05Canadian tax consequences of the cash-out refinance

CRA does not care that the borrower's collateral is in Florida. CRA cares about the use of the funds.

The application to a cash-out refinance is therefore mechanical. Cash-out proceeds used to pay down a Canadian HELOC that previously funded the property: interest on the new loan is deductible if the original HELOC was deductible. Cash-out proceeds used to buy a US-listed dividend-paying stock: interest is deductible against the dividend income, with foreign-tax-credit considerations on the dividends. Cash-out proceeds used for a kitchen renovation on the rental property: interest is deductible against the rental income on T776. Cash-out proceeds used to fund a child's university tuition or a personal asset: interest is not deductible.

The reporting question is separate. The new debt does not reduce the cost amount of the foreign property for T1135 purposes (the form reports gross cost amount, not net of debt), but the new mortgage is itself reported as part of the same property record. The Canadian return continues to report the rental income net of allowable expenses, including deductible interest, on T776, with foreign-tax credit on T2209 for any US tax paid on the same income.

Section 06Worked example: Canadian who paid cash, refinances at month 9

The following example uses Quebec as the reference province and the same benchmark property as the cash-vs-finance guide for comparability.

Setup at month 0. Canadian buys a USD 500,000 Florida condo for cash, paying CAD 685,000 at the prevailing rate of USDCAD 1.37. Closing costs on the cash purchase were 1.5% (no lender fees), or USD 7,500. The property is rented as a long-term lease, gross rent USD 36,000 per year, operating expenses USD 22,000 per year. The Canadian filed a § 871(d) election with the first 1040-NR.

Setup at month 9. Property has appreciated 4% to USD 520,000. The Canadian wants to extract equity to make a second purchase. The new loan is a foreign-national 30-year fixed cash-out refinance at 7.25%, 65% LTV, on the appraised value of USD 520,000, capped at USD 338,000.

Closing economics.

• New loan amount: USD 338,000.
• Closing costs (lender fees, title insurance, recording, appraisal, points if any): USD 10,000 to USD 12,000 typical.
• Net cash to borrower at closing: roughly USD 326,000 to USD 328,000.

Annual debt service.

• Monthly P&I on USD 338,000 at 7.25% over 30 years: USD 2,306.
• Annual P&I: USD 27,672.
• Year-1 interest portion: roughly USD 24,400.

US tax effect.

• All USD 338,000 of new debt is treated as acquisition debt for the rental property (the original cash purchase used the borrower's own funds; the cash-out replaces that funding). Under interest tracing, the new loan is fully deductible against rental income on Schedule E.
• Year-1 net rental income on Schedule E after interest, operating expenses, and depreciation (USD 14,000): negative USD 24,400 (paper loss).
• US tax owed on rental income: zero.

Canadian tax effect.

• If the cash-out proceeds (USD 326,000 = roughly CAD 446,000 at 1.37) are deployed to acquire a second income-producing property: interest on the new mortgage is deductible against the consolidated rental income on T776.
• If the proceeds are converted to CAD and parked in a Canadian savings account: interest is not deductible until the funds are deployed to an income-earning use; the Canadian must trace the funds and adjust the deduction accordingly.

FX consequence.

• The USD 326,000 net proceeds, converted to CAD at 1.37, return CAD 446,620. If the original CAD 685,000 outlay is netted against this, the Canadian's CAD-side equity-in-property has dropped from CAD 685,000 to roughly CAD 240,000, with USD 338,000 of debt offsetting the USD 520,000 asset.

US estate tax effect.

• US-situs gross estate exposure on the property drops from USD 520,000 to USD 182,000 (USD 520,000 less the USD 338,000 non-recourse mortgage). For a Canadian over 65 with substantial worldwide assets, this is the cleanest argument for the refinance.

Section 07Common mistakes

1. Confusing "delayed financing" with "cash-out refinance" terminology. Some lenders use the terms interchangeably; some apply different seasoning rules. The Canadian should ask the lender to confirm in writing whether the program treats the transaction as delayed financing (allowing immediate refinance after cash purchase) or as a standard cash-out (typically 6-month minimum seasoning).

2. Forgetting interest tracing under IRC § 163. A Canadian who refinances a Florida rental and uses half the proceeds to remodel a Canadian cottage will be able to deduct only half the new mortgage interest on Schedule E. Documentation of the trace from refinance proceeds to use is the borrower's responsibility, not the lender's.

3. Assuming the foreign-national cash-out rate matches the purchase rate. Cash-out rates run 25 to 50 basis points higher than purchase money, in addition to the foreign-national premium over conforming. A Canadian budgeting against the purchase rate quoted nine months earlier is consistently surprised at closing.

4. Triggering an unintended dual-status tax problem. A Canadian who is on the borderline of the IRS Substantial Presence Test (over 4 months a year in Florida across multiple consecutive years) may be classified as a US resident alien for tax purposes, which changes the cash-out tax analysis materially. The closer-connection exemption on Form 8840 should be filed annually for any Canadian who routinely spends more than 120 days a year in the US.

5. Treating the cash-out as a fresh property acquisition for T1135 purposes. The refinance does not change the Canadian's foreign-property position; it changes the financing of an existing position. T1135 reporting continues at the property's original cost amount, not the refinanced loan amount.

6. Refinancing into a higher rate just because rates moved. A Canadian with a 6.5% purchase-money mortgage who refinances at 7.5% to extract USD 100,000 must compare the marginal cost of the new debt (the full 7.5% on the incremental USD 100,000, plus the rate increase on the entire balance) against the after-tax return on the extracted USD 100,000. The full-balance rate increase is the part most often forgotten.

7. Forgetting to update Form W-8ECI with the property manager. The W-8ECI on file with the property manager certifies the § 871(d) election. A new lender placing a mortgage on the property does not require a new W-8ECI, but if the management arrangement changes at the same time as the refinance (a common pairing), the Canadian must ensure the new manager has a current W-8ECI in hand before the next rent disbursement.

Section 08Actionable checklist

1. Confirm property has cleared the lender's seasoning window (typically 6 months from the recorded deed date for foreign-national portfolio programs; verify the date in writing with the lender before applying).
2. Obtain current appraisals or lender-ordered automated valuation models from at least two lenders, to confirm the LTV math against the same number.
3. Quote rate and points from at least three foreign-national or DSCR lenders. Compare on APR, not on coupon rate alone.
4. Confirm the loan is non-recourse to the borrower personally. This is typically the case for foreign-national portfolio loans, but it is not automatic; recourse loans do not reduce the US estate tax base in the same way.
5. Document the use of cash at the original purchase. The lender will require evidence that the purchase funds were the borrower's own, not previously borrowed, if the program offers a delayed-financing option that bypasses seasoning.
6. Map the intended use of cash-out proceeds against the IRS interest tracing rules. If the proceeds will be deployed for multiple uses, calculate the deductible-interest fraction in advance and confirm with a cross-border CPA before closing.
7. Confirm the § 871(d) election is in effect for the property. If not, file the election with the next-due 1040-NR before refinancing.
8. Update the FX-conversion plan. If the proceeds will be moved to CAD, plan a staged conversion through a registered FX broker (Convera, Wise, or equivalent) rather than a single-day bank wire.
9. Update the T1135 record for the Canadian return to reflect the new debt against the existing property cost amount.
10. Re-run the 10-year cash flow model in CAD and USD, with the new debt service line and the updated US estate tax base.

Section 09FAQ

How soon after a cash purchase can I refinance as a Canadian? Most foreign-national portfolio lenders apply a 6-month minimum seasoning from the deed-recording date. Some programs offer a delayed-financing option that allows immediate refinance if the borrower can document that the purchase funds were the borrower's own and not previously borrowed.

Can I do a cash-out refinance on a property held through an LLC? Yes, but the loan structure is different. LLC-held properties typically refinance under DSCR or commercial non-QM programs, with the LLC as borrower and the member as guarantor. LTV ceilings are similar (65% to 70%), but the underwriting focuses on the property's cash flow rather than the borrower's personal income.

Will refinancing trigger FIRPTA? No. FIRPTA withholding under IRC § 1445 applies only to dispositions of US real property by foreign persons. A refinance is not a disposition. No FIRPTA filing is required.

Will refinancing trigger a Canadian capital gain? No. A refinance does not trigger a deemed disposition under Canadian rules. The property's adjusted cost base, holding period, and accrued gain are unaffected.

Are the closing costs deductible? Origination fees, points, and other lender-paid items must be amortized over the life of the loan, typically 30 years, on both the US Schedule E and the Canadian T776. They are not currently deductible in the year paid. Title insurance and recording fees are added to the property's cost basis, not amortized.

Can I refinance into a US dollar HELOC instead of a 30-year fixed? Yes. Several US lenders offer HELOC products to foreign nationals, typically capped at 60% to 65% combined LTV, with rates indexed to US prime plus a margin (US prime is 7.50% as of April 2026). The HELOC is interest-only during the draw period, which can be useful for short-horizon cash needs but expensive for long-horizon leverage.

What happens to the new loan if I sell the property? The new mortgage is paid off at closing on the sale, exactly like any other mortgage. The lender provides a payoff letter; the title agent disburses the payoff from sale proceeds before any net to the seller. FIRPTA withholding still applies on the gross sale price, not on the net after mortgage payoff.