As a Canadian, purchasing residential real estate in the US is complicated. Failing to undertake proper tax planning in advance can result in significant unintended costs and consequences, and decrease the value of your investment. This two-part blog series will first highlight the complexity of the different tax regimes that affect US real estate and underscore the value of obtaining professional tax advice. Then, it will highlight possible ownership structures that could help you reduce your tax exposure.
The Canadian and US tax regimes share many similarities; however, in Canada, only one tax regime applies to the ownership of US real estate (the income tax regime). In the United States, two regimes apply (the income tax regime and the gift and estate tax regime). On top of these different regimes, taxpayers must also consider the benefits accorded under the Canada-US tax treaty. Understanding and coordinating these different regimes is essential to: a) determine whether purchasing US real estate makes financial sense for you; and 2) minimize the overall tax consequences that may result from owning US residential property.
In Canada, the following tax rules impact US real estate:
Rental Income and Capital Gains – US rental income and the capital gain on the sale of US real estate may be subject to Canadian income tax.
Attribution Rules – The taxation of rental income and/or a capital gain on the sale of US real estate could give rise to the attribution rules (i.e. another person is deemed to be taxed on the income and/or the gain).
Deemed Disposition on Death - If you pass away, you will be deemed to have sold your US real estate immediately before your death. The deemed disposition rules also apply to a Canadian resident trust.
Principal Residence Exemption – The principal residence exemption may be available on the sale of US real estate but this is unlikely to be the most advantageous choice if other properties can be claimed, since US income tax will still be assessed on the gain.
Shareholder Benefit Rules – If the real estate owned by a corporation is available for the personal use of a shareholder, a taxable benefit may be conferred on the shareholder for that use.
In the US, the following tax rules impact the purchase of US real estate:
Rental Income – Rental income on US real estate is subject to US income tax. Non-residents are usually subject to US withholding tax at a flat rate of 30 percent on the gross rental income. Some exceptions apply.
Capital Gains – The taxation of a gain realized on the sale of US real estate by a non-resident is generally subject to US income tax.
Withholding Tax – Income and capital gains realized by a non-resident can be subject to US withholding taxes.
Imputed Income Rules – The US imputed income rules resulting from a benefit need to be considered.
US Gift and Estate Taxes - The US gift and estate tax represents an excise tax that is based on the value of the property transferred and could apply.
In summary, purchasing US real estate can be complicated, but with proper advice and planning these tax rules don’t have to be barriers to purchasing your dream property. For those of you still interested in taking the plunge, part 2 of this series will discuss possible ownership structures for purchasing residential US real estate.
*This blog post does not constitute tax or legal advice and cannot be relied upon as such. For advice on your particular situation, please contact CHY Accounting & Tax or another qualified tax professional.