Tax implications for Canadians owning US real estate

By
Real Estate Agent with Dwellings Realty Group

 

Tax implications for Canadians owning US real estate    

Estate Planning Can Defuse Tax Traps for Canadians Owning US Assets

If you are a Canadian who owns investments in the United States, including real estate, then you may be subject to US gift tax or transfers on the property during your lifetime or estate tax on your death.  These taxes can pose a serious burden on the estate of Canadians and other non-US citizens who own real estate and other property in the United States.

Even if you are not a US citizen or US resident, US estate tax generally applies to any of your personal assets located in the United States at the time of your death, including real property, certain tangible property and shares of US corporations.  The assets must be located in the United States with some degree of permanence, so that tax will probably not apply to jewelry or other items you might take with you on vacation.  However, it may apply to the furniture and artwork in your US vacation home.

There are several tax strategies you can put in place now to help reduce you potential US estate tax liability at the time of your death:

Leave property to your spouse or a qualified domestic trust

When property is left to a surviving spouse who is a US citizen or to a qualified domestic trust for the benefit of a non-US citizen spouse, the estate tax can be deferred until the death of the surviving spouse.

Acquire property jointly with your spouse or another person

Where assets are jointly held, on the death of the first joint tenant is deemed to own their share of the property as long as you can prove the joint tenants paid for the shares with their own funds.  Through this strategy, you can ensure only 50% of the assets' value is included in the estate of the spouse who dies first, rather than 100%.

Split your worldwide assets with your spouse

If your spouse's assets have a lower value than yours, consider having your spouse acquire full ownership of one or more of your US assets, such as a vacation property.  If your Canadian resident spouse's global assets are worth less than the US estate tax exemption amount (currently $3.5 million), there may be no US estate tax.  Seek further professional advice before doing so; however, the transfer could trigger the attribution rules or gift tax if you spouse does not use his or her own funds.

Consider a split interest purchase with your child

If you split your interest in the asset with your child, you acquire a life interest in the property and your child acquires a remainder interest with his or her own funds.  On your death, the life interest expires and is not subject to estate tax.

Hold your US Property through a Canadian corporation

US estate tax does not apply to US stocks and real estate held by a Canadian corporation.  However, US corporate income tax rates are generally higher than individual tax rates on capital gains.  Note, however, that if the real property is used personally, Canadian tax law may result in a taxable shareholder benefit unless you pay rent to the corporation.

Hold your US assets through a Canadian partnership that elects to be treated as a corporation for US tax purposes

By holding your US assets through a Canadian partnership that elects to be treated as a corporation for US tax purposes, the United States will treat the partnership as a corporation and US estate tax will not apply.

Consider a "non-recourse" mortgage on the property

A "non-recourse" mortgage entitles the lender to have recourse only against the mortgage property.  This strategy will reduce the value of your US real estate.

Sell you US property before death

If you exchange your US assets before your death for assets that are not located in the US, there will be no US assets left to form a taxable estate.

Take out life insurance to cover US estate taxes

Life insurance can fund payment of the tax without requiring the sale of your US assets.

 If either spouse is a US citizen or resident, these planning alternatives may not be appropriate.  Note also that the rules in this area are extremely complex and implementing any of the above plans may have unintended consequences.  Be sure to seek professional advice before pursuing these plans.

Contact Michael Roubal who is a partner at Dwellings Realty Group a Real Estate Brokerage in Scottsdale, Arizona helping Canadians purchase Scottsdale Real Estate directly at (480) 444.8264 C, or email at Michael@dwellingsAZ.com  to discuss your individual strategy.  You can check out more articles about Scottsdale Real Estate as it pertains to Canadians at Michael's website http://michael.dwellingsaz.com.

***The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.  Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.  No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. ***

Comments (1)

Joshua Roubal
Dwellings Realty Group - Scottsdale, AZ
Scottsdale and Phoenix Homes

Wow, lots of good information for a Canadian buyer here.  Nice work.

Feb 27, 2011 04:26 AM