Many Canadians have questions regarding the purchase or ownership of real estate located in the United States. What follows is a basic discussion of general tax considerations for Canadians who hold U.S. property. Speak to an advisor before moving forward with any foreign real estate transactions as there are a number of exceptions and interpretations that might apply in your individual case.
Do I need to file a U.S. income tax return if I buy a vacation home in the United States?
If you are not a U.S. citizen or green card holder and have spent less than 120 days in the United States on an annual basis, the IRS views a Canadian resident as a non-resident alien of the U.S. However, if you exceed that quota annually in the United States, please refer to our Snowbirds article to learn about your filing requirements.
Therefore, if you use the property for personal use only and you can prove that you are a non-resident alien and spend less than four months in the United States, it should not be necessary to file an annual U.S. income tax return if you a purchase vacation property in the United States.
What if I purchase a U.S. property and rent it out when I’m not using it?
You will be subject to U.S. income tax on the proceeds you receive from a U.S. rental as a non-resident alien. Since the IRS views you to have acquired income from a U.S. source, even if it was paid to you while you were in Canada, you will need to pay U.S. income tax on that money.
Here are your options:
1) Ask your agent to withhold 30 per cent of the gross rental income. This will require your agent to complete IRS Form 1042- S each year. It outlines the gross rental income and the U.S. tax withheld. Report said income on your Canadian tax return and the amount withheld without the need to file a U.S. tax return, OR
2) File a U.S. Non-Resident Income Tax Return, Form 1040NR and consider using an election to pay tax on the net proceeds from the rent, which will generally allow you to claim deductions (e.g., depreciation and property taxes) against the rental income. Report this on your Canadian tax return also. You will need a U.S. identification number to file Form 1040NR, if you don’t already have one.
Foreign tax credits can be claimed on your Canadian return for all or a portion of the taxes you pay in the United States.
What happens if I sell my U.S. property?
If you sell your U.S. vacation home or rental property, you must file a U.S. tax return which details any capital gains or losses on the sale and pay U.S. capital gains tax on any profit you incur. The U.S. agent must withhold up to 15 per cent of the gross proceeds and remit them to the IRS. If the person who buys the property plans to use it as their principal residence then this amount can be decreased. Some states also levy a withholding tax themselves. The amount of tax varies from state to state and you must acquire a U.S. identification number for this transaction.
The withholding tax will then be applied against the capital gain; you will receive a refund of any amounts in excess of your ultimate U.S. tax liability. To minimize the withholding tax, apply for a withholding certificate from the IRS.
Will U.S. estate tax apply in my case?
Generally, a Canadian can receive a US$60,000 exemption from U.S. estate tax on the value of a U.S. asset. A larger exemption as well as complete relief from taxes, depending on the amount of worldwide assets, may be available under the Canada–U.S. Income Tax Treaty. If the treaty applies, or if worldwide assets do not exceed $11.18 million (as of 2018) U.S. Estate Tax may not be charged. That said, your estate will still be required to file a U.S. Estate Tax return to claim the exemption.