Thinking of Buying US Property?
Erica Stephenson - May 08, 2017
Since the 2007 to 2010 U.S. housing crisis, which reduced property values to historic lows in many U.S. regions, there has been renewed interest by Canadians in buying their own vacation property in Florida, Arizona, Texas or other vacation destinati
Since the 2007 to 2010 U.S. housing crisis, which reduced property values to historic lows in many U.S. regions, there has been renewed interest by Canadians in buying their own vacation property in Florida, Arizona, Texas or other vacation destinations. Despite the weak Canadian dollar, for some investors the current prices may still seem comparatively attractive, especially to what is available in major metropolitan areas in Canada where prices continue to skyrocket.
There are many aspects to consider in making such a purchase. Besides your own family situation, familiarity with the area being considered and specifics of local laws are among things to check out to minimize surprises.
An aspect often neglected by Canadians is the potential of U.S. estate taxes that may accrue upon the death of the owner. Estate tax is truly a foreign concept for us. In Canada, there are no longer any estate taxes per se. Upon death, assets are deemed to have been sold, and capital gains tax, if any, will be payable by the estate, together with taxes on income up to the date of death, plus probate fees where applicable. But, in the U.S., taxes on the full gross value of the estate of the deceased may be payable, depending on the circumstances. Canadians, even those not living in the U.S., may be liable for U.S. estate tax on U.S. situs property, which includes U.S. real estate, U.S. business interests, shares and options of U.S. corporations, and more.
The U.S. estate tax rules allow a “unified credit,” such that the first $5.43 million of an estate’s value (in 2015) is not subject to the estate tax. The full amount of this credit is allowed for U.S. residents and citizens. For others, the allowed credit depends on the ratio of U.S. assets relative to the total worldwide asset value of the deceased’s estate. Thus, where the value of U.S. assets is relatively small, the credit will also be relatively small.
Nor does the Canada-U.S. tax treaty necessarily provide full relief. While there will be a Canadian credit for any U.S. estate tax paid, it may be limited to offsetting the Canadian capital gains tax on the identical property in the same year. In many instances, the relief may be small. In addition to the federal estate tax, individual states may also require estate taxes to be paid.
Complicating matters is that the estate tax rules in the U.S. may be subject to change in the near future, as the rules have changed frequently over recent years and the tax continues to be debated by U.S. lawmakers.
Offsetting the U.S. Estate Tax
Should you be considering purchasing U.S. property, tax planners suggest several solutions to avoid the possibility of U.S. estate tax problems. These include:
- Renting instead of buying — Nothing is owned, so no tax will be payable.
- Using a non-recourse mortgage — The value of an arm’s length, non-recourse mortgage may be netted out against the value of a property before the estate tax is computed.
- Buying life insurance as an offset —The proceeds of a term life insurance policy can offset the potential tax liability.
- Establishing a trust — Where a spouse and children are involved, a trust may be a solution, though more complex in nature.
Seek Professional Advice
Some of these and other options may be entirely impractical for your own situation. Our objective is to alert you to the possibility of a tax liability and suggest alternative solutions. Needless to say, this is a complex matter, and advice should be sought from a qualified professional who is familiar with U.S. tax law to avoid any unpleasant surprises. We can put you in touch with the right contacts.