Investing in US Real Estate
Investing in US real estate—beware of taxes
With the recent declines in the value of US real estate and the relative strength of the Canadian dollar as compared with the US dollar, it may be an ideal time to buy property south of the border. Those who decide to take the plunge need to consider the tax consequences associated with owning US real estate.
If you buy a US property and rent it out, either on a full-time or part-time basis, under American tax law the gross rent is subject to a 30 per cent withholding tax, which tenants are required to deduct and remit to the Internal Revenue Service. This is a high tax rate to pay. If you have expenses associated with the property (such as interest, property taxes and utilities), you would likely pay a much lower amount of tax if you were taxed on the basis of your net income from the property, using US tax brackets applicable to individuals.
Fortunately, US tax law allows non-residents to elect to be taxed on a net income basis. However, to benefit from this election, you must file a US tax return (Form 1040NR), which includes a statement that you’re making the election and specific information about the property.
Once made, the election is valid for that property for all subsequent years unless you decide to revoke it. However, it’s critical that you file Form 1040NR annually to report the rental activity from your US property. The normal deadline for filing your US return is June 15 for the previous calendar year. It can be filed late, but the net income election will only be valid if the return is filed no later than 16 months after the original due date.
If you don’t rent out your US property, you still can’t ignore American taxes. The US has an estate tax, which arises on the death of an individual, and this tax will apply to Canadians on any US property they own on their death. This tax can be a significant cost for your estate.
While the US estate tax rates are being reduced and exemption amounts are being increased, it’s widely believed that these reductions won’t be permanent. Planning techniques are available to mitigate your exposure to this tax, and you should consult with your professional advisor before acquiring any US real estate.
For more information on the tax consequences of investing in US real estate, visit BDO Dunwoody LLP’s website (www.bdo.ca) and read their bulletins, “US Tax Issues for Canadians” and “US Estate Tax Issues for Canadians.”