Tax Strategies for U.S. property ownership
If you own or are exploring property in the U.S. to use as a seasonal retreat for you and your family, tax planning is the essential first step toward ensuring a smooth sale, minimizing taxes and avoiding lengthy estate settlement process of probate. Here are two important tax strategies you need to know before you buy.
If you own or are exploring property in the U.S. to use as a seasonal retreat for you and your family, tax planning is the essential first step toward ensuring a smooth sale, minimizing taxes and avoiding lengthy estate settlement process of probate. Here are two important tax strategies you need to know before you buy.
Decide who will own the home
Canadian buyers need to decide who will own their U.S. home. Will it be an individual or some form of legal entity you create to minimize taxes, avoid the lengthy and expensive process of probate and allow the home to stay in the family with minimal cost. Your planning team in Canada can help to coordinate all the details and ensure that your wishes are clearly detailed in your Will and your estate plan. This chart provides a brief description of the three most common forms of ownership.
1- Type of ownership 2 - Who owns the property 3 - What to think about
1 - Joint ownership with survivorship 2 - You and your spouse are named on the deed and you are the sole owners of the property. 3 - After the death of the surviving spouse, the property will be subject to probate and estate taxes. This process can take up to 18 months and create an administrative burden for your heirs.
1 - U.S. irrevocable trusts 2 - The trust owns the property and you name the beneficiaries who will inherit the trust. 3 - The trust is responsible for paying any estate or capital gains taxes in the United States but there may be additional taxes due in Canada. Learn how to avoid this double-taxation.
1 - Canadian Discretionary Trust 2 - The trust owns the property and you name the beneficiaries who will inherit the trust. 3 - After 21 years, the beneficiaries automatically inherit the trust and all of its assets. The trust is responsible for all taxes.
Many factors will affect your decision. The planning process with an IG Consultant will help determine the best choice for you.
Manage your time in the U.S. to avoid surprises
Despite being a property owner, there is a limit to how much time you can spend in the U.S. each year. If you exceed this limit, you run the risk of being taxed as though you are an American citizen. In extreme cases, you could even be barred from re-entering the country. The limits are set by an agreement called the “Substantial Presence” test.
Here’s how it works:
For immigration purposes, Canadians can spend a maximum of 182 days in a 12-month period in the U.S. But for homeowners, there is a realistic threat that the U.S. government may decide to tax you as a resident. In that case, it would subject you to the U.S. tax on your worldwide income[*] if you spend more than 31 days in the current year add 1/3rd of the days in the prior year and add 1/6th of the days in the second prior year in the United States.
Plan with the right team
Whether your own or plan to buy a vacation home of your dreams in then U.S., having access to a team of tax and estate planning experts that can explain the rules and show you how to avoid U.S. tax traps it key to ensuring a smooth transaction. Contact me today and let me help you set the right course to success.
Discover more ways to make the most of your time in the sunny south, in ‘How to be a savvy snowbird’.
[*] The US taxes US citizens and “US residents” on their worldwide income. If the snowbird is present in the US for too many days, he risks becoming deemed a US resident and therefore subject to tax on his worldwide income. Consult with a Tax Specialist for information specific to your situation.