Are you a Canadian considering investing in cross-border real estate? Don’t make it a future tax liability.

May 05, 2017

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Many Canadians, especially those planning for retirement, consider ownership of an investment or vacation property in the US. While owning this type of property has many lifestyle and financial benefits, the decision to purchase US real estate may not be as easy as it seems, and there are potential downsides. It’s important to evaluate how potential tax consequences may affect you, and consider alternatives when deciding to purchase real estate in the US.

US Taxes to Consider Prior to Purchasing Real Estate.

When purchasing US real estate there are several things that a property owner can become liable to pay. Potential buyers should be aware of their residency status, the potential of income tax payable for rental property, federal estate taxes, capital gains, state probate rules and gift taxes.

WHAT IS AN NRA — Non-Resident Alien.

It is important to understand the basic rules of U.S. taxation as they apply to a foreign individual also known as a Non-Resident Alien or “NRA”. U.S. taxation of a NRA is determined by whether the individual is defined as a U.S. person and whether the asset is considered U.S. “source” or “situs” property.

Although the same terms are used for income, estate and gift tax purposes, the definition of a U.S. person, or a NRA, and what is considered U.S. source or situs property varies. For example, it is possible that an individual may be subject to U.S. income tax but not the U.S. estate and gift tax. Therefore, an individual must be very careful in reviewing the rules for the specific situation involved and seek the advice of qualified cross-border tax and legal professionals.

US Federal Estate Tax.

The US estate tax exemption is $5.45 Million. US non-resident alien’s in Canada are permitted to claim this exemption in proportion to their US source assets relative to the total value of their estate. The eligibility is based on the current US-Canada income tax treaty. For those with property holdings of significant value in proportion to their total estate, it is important to understand how best to structure your assets.

US Income Tax & Capital Gains.

A non-resident that owns income-generating real property must pay withholding tax unless a choice is made to treat the property as a business. In this case, if a tax return is filed, the tax rate will apply to your net rental income.

US Federal Gift Tax.

Unlike Canada, the US taxes gifts. The IRS defines a gift as “Any transfer to an individual, either directly or indirectly, where full money’s worth is not received in return.” When a taxable gift is made in the form of real estate, the tax is usually the responsibility of the person making the gift, with the exception of an annual gift tax exclusion of $14,000. When property is transferred below market value, it is a partial gift, and the difference between fair market value and the amount paid is calculated as the dollar value of the gift. The gift tax differs from the estate tax in that the gift tax applies when a gift is made during the donor’s life, whereas the estate tax applies when a gift is made after the donor’s death.

Planning Strategies to Mitigate the U.S. Estate and Gift Tax.

For individuals with U.S. assets that are subject to the U.S. estate or gift tax, proper planning is critical to mitigate any potential tax liability. Taxation plays a significant role for Canadians making U.S. investments. The U.S. tax rules are complex and vary among the income, estate and gift tax structures and rules. However, opportunities exist and with strategic planning, U.S. investments will continue to be an attractive option. 

GET THE HELP YOU NEED: We focus on providing comprehensive tax solutions that align with our client’s goals. We are specialists in this intricate area of real estate investment in the US, and tax planning. Knowing the rules will help you ensure your investments are protected.

What We Do:

  • Real Estate Investment
  • Investment in US real estate
  • Canadian non-resident investment in Canadian real estate
  • US and Canadian cross-border estate and gift planning
  • Assistance in US citizenship renunciation, expatriation consulting and compliance
  • US tax planning for ownership or beneficial interests of non-US corporations, trusts and partnerships
  • US tax advice on ownership structures in the US
  • US tax planning in the event of marital separation
  • Residency
    • US tax planning for “Snowbirds” or future “Snowbirds”
    • Relocation and immigration planning to Canada from the US or to the US from Canada
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