One of the background issues within land ownership is estate taxes. As a Canadian who owns U.S. real estate, there are options to avoid paying out too much in U.S. estate taxes. Keep in mind that getting financial consultation with an accountant to work out the details of your situation is well worth the time and fees because your tax pro will help you figure out the best set-up for you. Even after you have performed due diligence and figured out a way to save the most money, it’s smart to take your information to be qualified by an expert.
In general terms, here are some considerations for U.S. real estate ownership:
1. Create incorporated entity structures: If you are purchasing more than one property, entity-creation is probably the best choice for ownership registration. Canadian and U.S. entity-structuring will be slightly different and you will need to hire an accountant and a lawyer to establish a set-up that protects your investments. It may sound like a hassle but it will save you a lot of estate and capital gains taxes.
2. Register the home under a joint name: If you are interested only in a snowbird home, it may be most beneficial for you and your spouse/partner to register your U.S. real estate jointly. Joint ownership will minimize your U.S. tax exposure and is likely to lessen your payments. Remember that if you choose this ownership option, both parties have to provide documentation to prove each person has contributed to the purchase using their own money.
3. Use a fund or a trust: Yes, you can register your real estate under a trust to avoid taxes. A fund or a trust may be a viable choice for those interested in investment property or vacation homes because your estate and capital gains tax would be minimal. Eventually though, the piper must be paid and you will have to pay taxes following a time limit.
My favored and current strategy (which I paid accountants and lawyers to create and register) is definitely option 1 – entity-structuring. This is a good option for Canadians buying U.S. real estate as a strategy to build wealth. Depreciation will defer your taxes while you continue to grow your corporations and your accountant should be able to move the money around and give you the run-down of accessible cash as the grace periods lapse. In the meantime, you keep the extra cash to carry on business.