Are you a Canadian planning on investing in U.S. Real Estate by purchasing a second home in the United States?
If so, then you should be able to realize that the U.S. and Canada are two very different countries. Any investor must have a basic knowledge regarding these differences. So before spending your loonies in the U.S. real estate, read and understand these following distinctions.
United States Tax System
- If a property is sold and the seller himself is receiving cash amounts through capital gains, the seller is taxed at 15% of the net gain. This is implemented when the property is already owned for 1 year. If less than a year, then the charge is higher.
- 1031 Exchanges or IRS (Internal Revenue Code) section 1031 permits the capital gains of a sold investment property to be deferred and rolled to get the same kind of property bought within a period of 180 days. This can be repeated as many times possible as long as the ending asset is set out.
- High property taxes for non-residents, like Canadians, are also implemented on states like Florida and California. However, tax obligations like this can be removed by filing Closer Connection Exception Statement for Aliens’ form or IRS form 8840 every year.
- Same as the Canadian tax laws, an individual is not taxed at his/her main residence. However, one can write-off the charged interest in his/her home.
Canadian Tax System
- When your property in Canada is sold, an individual is required to pay 50% of the capital gain tax from the total net gain. Deferring the gain through an exchange is not yet available as an option in Canada. The corresponding gain or loss then is added to one’s income and then taxed with an equivalent rate. It can possibly be much higher than the even rate of 15% in the U.S.
- When holding a property for investment, expenses connected with it can be written-off against one’s taxable income.
So when considering a state/city to invest in, see first if non-resident property taxes are being charged or implemented. Don’t buy another property when you already own one in the States just to use the strategy for 1031 Exchange. Sell the property first to avoid being required to pay U.S. tax on sale. Next would be to pay the U.S. then file the tax return in Canada and you’ll pay once only but you will need to file 2 returns. Then, you will be able to obtain credits in your Canadian taxes.