Lots of planning urged before buying U.S. property
The U.S. real estate market is still attractive for many Canadians looking for that second home. Whether it is to escape the long cold winters, or to have a second place near your children who have moved south of the border, the U.S. has some very well-priced opportunities.
That being said, as Canadians you must be careful of the tax and estate implications of owning U.S. property.
The reasons behind a U.S. purchase typically fall into one of two categories – a property for personal use, or a rental property to generate income. Both come with exciting opportunities, but both have their own unique set of issues.
Let’s begin by discussing personal-use properties.
You are now the proud owner of a new beachfront property in sunny Florida and plan to spend as much time as you are legally entitled enjoying the fresh ocean air – so what can possibly be of concern?
Plenty. For starters – what happens if you become mentally incapacitated? Typically, your Canadian power of attorney documents are not recognized in the U.S. This means that in the event you, or anyone on title of the property, become mentally incapacitated, the property will be frozen. You will not be able to sell or rent the property until you go through a guardianship procedure in the U.S. This is a very expensive and time-consuming process, which we certainly want to avoid.
A second issue is probate, and we are not talking about Ontario probate that your estate will need to go through upon your death, but a second probate procedure in the county where the property is located. This is the legal process necessary in order to transfer title to your beneficiaries. Probate is also very expensive and time-consuming and once again the property will be frozen until probate is complete. The way you hold title to the property will determine when probate will take place, but as long as the property is held personally, without further planning, probate will kick in at some point in time.
Next we need to understand what our tax liabilities are when we own a personal-use property in the U.S. We need to concern ourselves with capital gains as well as U.S. estate tax. If you sell the property there will be an obligation to record your capital gains on both sides of the border. However, due to a treaty there is no double taxation. Canada will give you a credit of the 15 per cent you paid to the U.S. and simply ask that you pay the 8-per-cent difference so that in the end you are only paying a total of 23 per cent.
But what happens on the U.S. side if you die while owning property? Now we need to concern ourselves with the U.S. estate tax. In essence, this is a death tax. The IRS says that if you, as a Canadian, pass away with U.S. assets, you might have a U.S. estate-tax liability. The way to determine the extent of this tax is based on a fairly complicated formula, but mainly asks two fundamental questions: Are your U.S. assets worth more then $60,000? And if so, is your worldwide estate worth more than $5,250,000? If the answer is yes to both of these questions then you will be taxed at a graduated rate of up to 40 per cent.
In addition to these issues, if you are purchasing for the purpose of generating rental income we now have two additional issues, income tax and liability. The income tax works the same as the capital gains discussed above. Canada will give you a credit of what you paid to the U.S., so at the end of the day you will simply be taxed at your Canadian marginal rate.
The liability on the other hand poses serious risk. Should your tenants sue you for an injury sustained on the property, they may look to come after your worldwide assets for compensation.
We have really only begun to discuss the various issues surrounding U.S. ownership, but proper planning, whether through a cross-border trust or some other structure, can help avoid or alleviate the complications surrounding owning U.S. property.
David A. Altro is a Florida attorney, Canadian legal advisor and managing partner at Altro Levy. He is also the author of Owning U.S. Property – The Canadian Way and can be reached at email@example.com. Jason S. Ansel provided research to this article.