Whether for investment or retirement, more Canadians are purchasing U.S. properties. The aim of this article is to discuss the tax compliance that surrounds it.
Personal/Vacation Use:
When purchasing a home for personal/vacation use, you do not have any tax reporting compliance to the U.S. so long as it doesn’t generate any income (no Airbnb).
If the property is worth more than $100,000 CAD, you now have specified foreign property. You (or your accountant) have to check the box on your T1 indicating as such, A T1135 will need to be completed and submitted on time. Failure to file will result in $2,500 penalty per year.
When the property is sold, a 1040NR will need to be filed in USA for the year of sale. Most likely there will be capital gain tax to be paid. It is advisable to keep record of all costs of any repairs, improvements or similar expenses made on the property between purchase and sale in order to arrive at the adjusted cost base. This will minimize the actual capital gain and the tax.
Note that there is a substantial presence test, and if you’re at your vacation property long enough, the U.S. will consider you a U.S. person for tax purposes. Here’s how it works:
if you have been in the U.S. at least 31 days in the current year, and total at least 183 days after adding up the following three:
- Days present in U.S. in current year
- 1/3 of days present in U.S. in the year prior
- 1/6 of days present in U.S. two years prior
If it’s anything less than 183 days, you don’t meet the substantial physical presence test and will not need to file worldwide income in USA 1040 along with FBAR and other forms.
Rental Properties
Any rental activity in a US property will require you to file a 1040NR.
All rental income and expenses such as mortgage interest, utilities, property management, repairs, maintenance etc. will need to be reported in Schedule E which is a part of the 1040. Please keep records of these expenses.
This rental activity will also need to be reported in your Canadian return. Any tax paid in US on the 1040NR to do with this income will be used as Foreign tax Credit when filing the T1.
There is a treaty between USA and Canada and you will NOT be taxed on the same income twice.
Property tax implications.
Each state in the U.S enforces its own tax laws. While broadly similar, there are certain differences. For example, the median property tax rate in Hawaii is 0.26%, whilst the median rate in Texas is 1.81%. That’s a difference of 1.55%, or $6200 of taxes a year on a $400,000 dollar home. When you’ve narrowed down your search to a few cities, be sure to check their respective state real estate tax laws.
Whether for personal use or an investment, owning a U.S. property introduces new areas of tax compliance. IDM Professional Corporation has more than 10 years of experience in cross-border tax and can help you properly navigate these areas.
