Many Canadians have considered purchasing or purchased real estate in the U.S. for investment/rental purposes due to the strong Canadian Dollar and the relative affordability of homes in some U.S. cities.
What many individuals don’t consider are the potential tax consequences and U.S. filing obligations of this purchase that can be costly both to prepare and in potential fines.
Canadians who are considering buying property or who already own property in the U.S. need to be aware that they may be subject to federal and state taxes as well as estate taxes on their property later on.
Listed below are some important items to consider if you are planning to purchase or already own property in the U.S.:
1) How long you are planning on staying in the U.S. each year:
If you are present in the U.S. for 183 days or more you will be deemed a resident of the U.S. for U.S. tax purposes. As a result you will be required to file a US tax return and report your worldwide income (Note that there is a tax treaty between Canada and the US which helps prevent double taxation).
The U.S. also has a substantial presence test that if you meet will also treat you as a U.S. resident for tax purposes. The test is a rolling three year calculation which if it equals more than 183 you are deemed a U.S. resident for tax purposes. The calculation is 100% of your current year days in the US plus 1/3 of your days for the year immediately prior to the current year plus 1/6 of the days for the year two years prior to the current year.
In some cases, if the individual meets the substantial presence test they can avoid being subject to U.S. income taxes if they file Form 8840 (Closer Connection Statement for Aliens). For more information please see our article on this Form here.
2) What the property is being used for:
If the property is only being used for personal use (ex. vacation property) and is not being rented out and you do not meet the substantial presence test you generally should not have any U.S. tax obligations until the property is sold or the use is changed.
If the property is being rented out you will be subject to U.S. tax on the income and will have U.S. filing obligations on a federal and possibly state level. Normally, the gross rental income will be subject to 30% withholding. However, if the proper elections are made you can choose to file a U.S. non-resident tax return and pay tax on the net rental income (i.e. gross income less allowable rental expenses).
For more information on U.S. rental property income please click here.
3) U.S. State issues:
Most of the 50 states have their own tax laws in place in addition to the U.S. federal tax laws.
Depending on where your property is located and it’s usage you may be required to file a state income tax return as well as a federal income tax return.
4) Selling the property:
If the property is sold you will be subject to U.S. tax on the capital gain and will be required to file a U.S. federal income tax return.
As a foreign person selling U.S. property you will also be subject to a federal withholding tax of 10% on the selling price. There may also be state withholding depending on which state the property is located in. This withholding tax can be applied against your overall U.S. tax liability calculated on the U.S. income tax return.
5) Estate tax:
If a Canadian owns U.S.-situated assets whose fair market values exceed $60,000 at their death the estate will generally have to file a U.S. estate tax return.
At Hutcheson & Co. LLP we have extensive experience consulting and advising clients on purchasing U.S. real estate and navigating the U.S. filing and tax obligations. If you are considering purchasing U.S. real estate we recommend that you consult with your tax adviser to help make the investment worthwhile.
The information contained in this article is for general use only and should not be viewed as professional advice. Accounting and tax rules and regulations regularly change and individuals should contact a competent professional to obtain accounting and tax advice based on their specific situation.
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