By: Sheryl Smolkin
Read this article and comments at Moneyville.ca
As the days get shorter and the temperature plunges, buying a home at a deeply discounted price in the southern U.S. becomes ever more tempting. But unless you get good cross-border tax advice, your bargain could end up being much more expensive than you expected.
As Director of Scotiabank’s Tax Advisory Services, Adam Salahudeen frequently advises Canadians considering the purchase of a U.S. property. “Often Canadians spend hours cancelling their newspapers, stopping their mail and arranging for someone to look after their Canadian property,” he says. “But they ignore the really critical issues such as U.S. property taxes and non-resident tax-filing laws.”
Here are some questions to ask.
1. How long are you planning to live in the U.S. each year?
If you spend more than six months in the U.S. in a single year, you must file a U.S. tax return, and the penalties for not filing can be stiff, even if you do not owe taxes. You can apply for a tax exemption to extricate yourself from the U.S. tax filing burden if you are deemed to be a U.S. resident for income tax purposes, but this requires sound advice from a cross-border tax expert.
2. Should you buy or rent?
Whether you decide to buy or rent may in part, depend on how much time you plan to spend in the U.S. each year.
If you plan to rent out the property for part of the year in order to help cover costs, you should be aware that there is a 30 per cent withholding tax normally applied to the gross rent paid to you, which is not reduced by the Canada-U.S. Tax Treaty.
However, you can avoid all or part of the withholding tax by voluntarily filing a U.S. tax return and electing to pay taxes on rental income, net of expenses such as mortgage interest, maintenance, insurance and property taxes.
3. Where do you want to buy?
Consider the pros and cons of locating in various U.S. states. For example, property taxes are 20 per cent higher for non-resident owners in Florida. This is one reason why California, Arizona and Reno, Nevada have become increasingly attractive to snowbirds.
Also take into account ease of access from your Canadian home and potential challenges dealing with routine maintenance and more catastrophic problems from 3,000 or more miles away.
4. How will you hold the property?
In Canada it is common for spouses to hold property in “joint tenancy with a right of survivorship.” As a result, upon death of the first spouse, the second spouse becomes the full owner, with no immediate tax consequences.
In the U.S. there is a rebuttable presumption that each spouse is a 100 per cent owner of that property. In addition, there is estate tax on the death of each owner who has a worldwide estate exceeding $5 million in value. Even if there is no estate tax, the estate must file a U.S. tax return if the property is worth over $60,000.
Therefore, to avoid potential double taxation, it is preferable for the parties to hold the house as tenants in common, with each person having 50 per cent ownership. There are also other possible ownership options you can investigate such as a Cross Border Revocable Living Trust, a non-recourse mortgage, a Canadian partnership or a Canadian discretionary trust.
5. Financing/Insurance issues: Most people get financing in Canada to pay cash for their property in the U.S., but there are financing programs available to Canadians in the U.S. if you put a large amount of money down.
Another major consideration is insurance which can be very expensive, particularly in some coastal areas where hurricanes and flooding are common. And of course you must have out- of-country medical insurance which becomes more costly as you age.
6. What if you sell the property?
A sale of the property results in a 10 per cent withholding tax which is offset by the capital gains tax payable when you file the mandatory U.S. tax return. You may also be liable for Canadian capital gains tax if the property was not your personal residence.