Owning U.S. Real Property – The Basics

Part I – Renting out the property

Canadians who earn rental income from U.S. real estate may be subject to U.S. income tax except when the rent is earned from a U.S. vacation property that is rented for less than 15 days. Rental income earned for investment purposes and not connected to a U.S. trade or business is taxable under the following two options:

•  Pay 30% withholding tax on gross rent with no requirement to file a U.S. tax return

•  File a U.S. non-resident tax return and pay tax on net rental basis

The resulting tax liabilities and compliance costs are different under the two options. You should consult with a tax advisor to determine which option is the better for you. On the Canadian side, you may claim a foreign tax credit with regards to the U.S. taxes to reduce your Canadian tax liabilities. 

Part II – Sale of the property 

When you sell the U.S. real estate, the following tax implications will arise:

• Under the Canada-U.S. tax treaty, unless certain exceptions are met, the gross sale proceeds will be subject to a 15% U.S. withholding tax at the time of transfer (the withholding tax is 10% if the  transfer was made before February 17th, 2016.

       (Contact us to find out more exceptions.)

• A net taxable capital gain, depreciation recapture and an unrecaptured s1250 gain as determined  under U.S. income tax laws, if any, should be reported on a U.S. non-resident income tax return. Net taxable capital gains and recapture determine under Canadian tax laws should be reported on a Canadian income tax return. Due to the difference in tax laws between the two countries, the tax result can be drastically different. 

Part III – Estate planning involving U.S. property

Canadians may be subject to U.S. gift tax only when making gifts of “U.S. tangible property”, such as U.S. real estate, if the value of the gifts in a year exceeds certain annual thresholds. Additionally, you may trigger U.S. gift tax, as well as Canadian tax, by adding someone else on title to U.S. tangible property you own or have purchased.

If you die owning “U.S. situs assets” such as U.S. real estate, you may potentially be subject to U.S. estate tax on the market value of the property. In Canada, you may also be subject to tax on the accrued capital gain of the property due to appreciation of the property value and/or even currency fluctuation. 

You should have a valid Will that properly addresses your wishes with respect to your U.S. real estate. Although a Canadian Will may be adequate, complexities may arise due to potential differences between the Canadian and U.S. succession laws. 

Furthermore, you should consider whether you require a separate POA in the U.S. state where your real estate locates in order to deal with the property in the event of your incapacity or disability. POAs are legislated at the state level in the U.S.  A Canadian POA may not be valid in the U.S. 

Part IV – Final words: 

Whether you already own U.S. real estate or are considering making a purchase, there are significant tax and estate planning implications to consider. You should familiarize yourself with all the potential tax and legal issues. Speak to your cross-border advisors for advice if you own or are planning to acquire U.S. real estate! 

If you have any questions or comments about this blog post, please feel free to contact us. 

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