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What Canadians Need to Know About Buying Real Estate in the United States


The U.S. has always been a hotspot for Canadian real estate buyers, and thanks to the lasting effects of the U.S. financial crisis, it seems that there's no time like the present to purchase property south of the border. From March 2012 to March 2013, Canadians represented 71% of all foreign residents who bought property in the U.S. Canadian Snowbirds in particular have been keen to profit from this situation, as real estate markets in states like California, Arizona, and Florida have been experiencing record low prices in recent years.

However, while buying U.S. property under these conditions might seem like a sure-fire investment, there are several taxation factors to take into consideration in order to ensure that your investment is a wise one. If you want to be certain that you're paying as little as possible in taxes for your U.S. property, there are several important taxation factors that you should be aware of.

The Dreaded Estate Tax and Why You Probably Don't Need to Worry About It

One of the biggest concerns that many Canadians have about buying property in the U.S. is the estate tax, which applies to any U.S. assets that an individual owns at the time of their death. However, recent changes in U.S. tax law now mean that most Canadians have nothing to worry about when it comes to the "dreaded" estate tax.

In January 2013, the U.S. government passed a bill that made several changes to their estate tax laws. The most significant of these changes was raising the exemption level to US $5.25 million. This means that if your worldwide estate is worth under US$5.25 million, you will not be charged estate tax in the U.S. In addition, this exemption is now permanently tied to inflation, which means that the exemption level will continue to rise over time rather than fluctuate like it has in the past. So unless you happen to be in the top 1 or 2% of wealthy Canadians, the estate tax will no longer haunt your U.S. real estate endeavors.

And if you do happen to be above the threshold level, there are still measures you can take to reduce your exposure to the estate tax. These measures include changing the ownership structure of your U.S. property, owning the property through a Canadian discretionary trust, seeking a non-recourse mortgage against your property, and others. Those who are concerned about being hit by the estate tax should pay a visit to a tax professional for more information.

Other U.S. Taxes You Probably Do Need to Worry About

Avoiding the estate tax will save your estate a fair amount of tax dollars, but this isn't the only type of U.S. real estate tax you need to be worried about. If you own real estate in the U.S., the IRS will generally require you to pay taxes on any income that you make from your property, including any rental income acquired while you own the property and any capital gains made upon the sale of your property. In addition, even if you don't owe any taxes in the U.S., the IRS may require you to file a U.S. tax return if your worldwide estate is worth more than $60,000.

All of this means that most Canadians who own property south of the border will need to apply for an ITIN or Individual Taxpayer Identification Number with the IRS. Even if you're a non-resident alien of the U.S., you will still need to obtain an ITIN for your U.S. property. And if you own a property jointly with someone else, each person will have to file a U.S. tax return in order to keep the IRS happy.

Minimizing Taxation When Purchasing Your U.S. Property

If you're considering buying a property in the U.S., but haven't done so yet, it's worthwhile to take some time to consider the different purchasing options available. The simplest way to purchase property in the U.S. is to buy personally, but this may not always be the most desirable option depending on your circumstances. Other ways to purchase are through a partnership, a joint ownership, or a corporation.

Most U.S. advisors will readily recommend purchase through a U.S. Limited Liability Corporation (LLC) but this is not a route that a Canadian should EVER follow as it can lead to double taxation. Knowing how best to structure your U.S. property purchase can be challenging, and it's always recommended that you consult with a professional before making any final decisions.

Minimizing Taxation When Renting Out Your U.S. Property

For those who decide to rent out their U.S. property, the biggest taxation concern will be the withholding tax. This tax requires foreign property owners to remit 30% of all their gross rental earnings to the U.S. government.

Before you get too worried about this large percentage, you should know that there is an exemption available that will allow you to significantly reduce how much you pay in withholding taxes. This exemption is called the Net Rental Election. Filing a Net Rental Election allows you to pay withholding taxes only on your net rental income rather than your gross rental income. With this exemption, you are allowed to deduct any expenses that you have on your property including payments for mortgage interest, property taxes, insurance, repairs, property management, utilities, and so on.

Avoiding Double Taxation When Selling Your U.S. Property

Another taxation concern arises when we look at selling your U.S. property. When a Canadian sells a U.S. property, they not only face capital gains tax in the U.S., they are also required to report any capital gains from their property as income on their Canadian tax return. In addition, some U.S. states also have their own capital gains tax, which means that you could end up paying capital gains taxes twice in the U.S.

Those concerned about double taxation between Canada and the U.S., however, can rest assured that the Canadian government offers a foreign tax credit to offset any capital gains taxes paid down south.

In Conclusion

While buying real estate in the U.S. can be a smart investment for Canadians, dealing with cross-border taxation issues can be complex, and these issues can become costly if they are not handled correctly. In order to make sure that your investment is protected, it's always helpful to hire an accountant who understands how both Canadian and U.S. taxes affect foreign property ownership. George van Wensem is a certified accountant in both Canada and the U.S., and has the experience and knowledge to help you make the most out of your cross-border investment. For more information on buying real estate in the U.S., contact Van Wensem & Vukets to arrange your consultation.

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