Many Canadians dream of heading south to purchase U.S. real estate to escape the frigid weather during winter.
Many of them think about purchasing U.S. real estate in order to have a place to stay during winter time. The strong Canadian dollar and collapsing housing market in the United States makes owing U.S. real estate a very attractive investment proposition to most Canadians.
However, there is a huge difference between the U.S. real estate and Canadian; especially regarding taxes. Any Canadian who is planning on purchasing U.S. real estate for investment should have at least a basic understanding of key issues regarding buying real estate. The differences between buying real estate in Canada and the U.S. should also be considered. Here are some of the important tax laws in both countries:
In the United States (when dealing with U.S. real estate):
1. If there are capital gains when a property is sold and cash is received by the seller, he/she (the seller) is taxed at 15% of the net gain. 15% is the rate for properties that are owned for more than 1 year and the rate is higher if it is owned for less than that time period.
2. The Internal Revenue Code section 1031 (more commonly known as 1031 Exchanges) states that capital gains from the sale of property can be deferred and rolled into the purchase of a similar kind of property as long as it is bought within 180 days. This can be done as many times as possible allowing capital gains to be deferred until the last asset is finally disposed of.
3. Some states like Florida and California have higher property taxes for “non-residents” such as Canadians. However, most of the other states have comparable property taxes to those in Canada. There is s computation of the number of days that visitors and non-residents are allowed to stay in the U.S. without tax obligations. However, if the primary residential ties are really with Canada, filing IRS form 8840 (Closer Connection Exception Statement for Aliens) can get rid of tax obligations. This form should be filed every year that the substantial presence test is met.
4. Somewhat like Canadian tax laws, the person will not be taxed on his/her primary residence but in the U.S., interest charged on the person’s home can be written-off.
1. Selling an investment property in Canada requires payment of capital gains tax on 50% of the total net gain. There is no option of deferring the gain through an exchange in Canada. The gain or loss is to be added to the income and taxed at the applicable rate (this could sometimes be higher than the standard 15% U.S. rate)
2. Like in the United States, expenses connected with holding a property for investment can be written off against the taxable income of an individual.
It is very important to talk to an accountant or tax expert who deals with u.s. real estate in order to find the least amount of tax that can be paid. There are many loopholes that can be used in order to have a lower capital gains tax in U.S. real estate.