In the last few years many Canadians have purchased vacation homes in the US considering it to be a good investment (and are continuing to do so). One thing that every potential buyer of US real estate should remember is that this investment could turn into an expense if not properly planned for. AG Tax advisors have assisted many clients in planning their purchase of US real estate and filing required forms.
As a US property owner, one may be subject to federal and state taxes on a yearly basis and estate taxes later on. Let’s have a look at some issues that should be kept in mind when owning (or looking to purchase) US real estate as a Non-US person.
Federal and State Taxes
Time period of stay: If you are present in the US for 183 days or more in the current year, or meet the substantial presence test, you will be deemed a resident for US Tax purposes. If you are deemed a US resident you will be required to report on your worldwide income, not simply the income earned from US sources.
Usage Purpose: If the property is solely owned for personal use and your stay is within 183 days, you will not be subject to any taxes unless the property is sold and results in a gain. As mentioned before however, you will be required to report your worldwide income every year you are considered to be a US person.
If renting the property and are not considered to be a US person, you may be subject to US reporting requirements. Normally, the gross rental income would be subject to 30% tax withholdings, however (after making the proper elections) you can choose to file US tax returns and pay taxes on the net rental income. This is obtained after deducting rental property expenses such as utilities, insurance, maintenance fees, property tax, and mortgage interest.
Additionally, through the ‘foreign tax credit’, you can offset a portion of the Canadian income tax on the US rental income property with any taxes you have paid on the same income in the US.
State issues: Majority of the states in the US have their own set of taxes in addition to the federal tax. If your property is located in one of these states you will be required to file both a state and a federal tax return. However, if your property is located in one of the states with no personal income taxes, you would only be required to file a federal tax return based on the time you spent in the US and how your property was being used.
Sale of US Property
In the event that you decide to sell the property, you will be subject to US taxes on the capital gain, which needs to be reported by filing a US federal tax return. Only the net gain is taken into consideration, after deducting any expense incurred on property improvement.
The Foreign Investment in Real Property Tax Act (FIRPTA) mandates that 10% of the amount realized on the sale of US property by a foreign person is withheld for tax purposes. Certain states also require amounts to be withheld. There are certain exclusions that can be made to reduce this amount, which is why it is important to consult your AG Tax advisor to determine what treatment fits your situation the best.
Estate Taxes
Any non-resident purchasing real estate in the US is also subject to US estate laws. Estate taxes are levied only if the value of the US situs gross assets (including other assets as US stocks, etc.) exceeds $60,000. Proper estate planning can serve to potentially minimize the tax impact.
Purchasing US real estate as a foreign person can open the door to many unforeseen filing and tax obligations. If you are looking to purchase US real estate, it is always advisable to consult a cross-border tax professional and estate consultant in order to make it a worthwhile investment.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance.
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- State Sales Tax & E-commerce Taxation
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
