Classification.
3-Real-estate : tax and other issues
Canada
Investing in US real estate
Many Canadians invest in US real estate – whether it is as a snowbird for a multi-month (winter) period, as a winter skiing cottage, or a summer vacation getaway. Before doing so, various tax related issues must be considered. Issues range from local taxes to the tax consequences of an eventual sale. All issues must be considered.
1-Local taxes
While the perception is that US taxes are generally lower (especially at the state level), the lower rate is partly because local/municipal governments have additional responsibilities. For instance, while schools (one example) are usually a provincial responsibility in Canada (with less local “financial” responsibility), schools are quite often a local responsibility in the US. As such, you may find yourself with local taxes that are much higher for your cottage or secondary home in the US than for an equivalent home in Canada. Also, “late payment fees” (quite often a % of the amount owed) are quite often more onerous in the US than in Canada. Do not forget to pay your local US taxes on time!
2- Renting your cottage/secondary residence
While lending your cottage to a close friend or family member is generally fine – even allowing them to contribute to basic expenses (Internet etc.) is allowable, systematically renting your secondary home to people outside your immediate network, in most cases, will require you to file a tax return with the IRS (Internal Revenue Service). Before renting your secondary residence, costs related to an IRS filing, the related work involved, other administrative costs (additional insurance, operational expenses such as cleaning etc.) and the end- tax liability should be considered. Mind you, when using a vacation home as an investment, this may also entitle you to deduct certain expenses related to the rentals. Either way, a limited number of short-term rentals may simply not be worthwhile or a good business plan. Note: There are specific fiscal rules for US citizens based on the number of days rented in a year.
3-Selling your home
In Canada, there are tax consequences when selling a secondary residence. In most cases, this will also be a consideration in the United Sates – and rules can be less generous. And being a Canadian citizen does not allow you to avoid this part of the US tax system – withholding taxes can get removed when you are at the lawyer’s office when selling the vacation home (getting a clearance letter and the eventual IRS tax return are whole other topics). If you are purchasing your secondary home partly as an investment, the amount of taxes you will have to ultimately pay should thus be a consideration. In addition to IRS (Internal Revenue Service) issues, quite often there are state taxes to pay which sometimes top 10% and are also sometimes withheld at the closing. While laws (specifically the Foreign Investment in Real Property Tax Act) and the application of rules with respect to the amount of the capital gain may change over time, it is advisable to keep all receipts with respect to expenses incurred. Some expenses could get added to the cost base, thus reducing your capital gains. For instance, an extension to your cottage would likely be part of the cost base when considering capital gains, while saving receipts for paint (unless it is for the extension!) is unlikely to be relevant. As a general rule, upgrades and improvements get added to the cost base. Either way, keep all receipts – better safe than sorry!
4-Purchasing in the US : Other considerations
Other than the typical border considerations, there are no specific legal impediments to purchasing a vacation home in the US. If your plan is to work from your home though, you may be entering into a grey zone. Travelling to the US for meetings, conventions etc. with a specific return date is not an issue. However, spending an extended periods of time in US and staying in contact with your office with your laptop and phone may not be well thought of by a border agent. If your plan is to buy a US home with this in mind, you should consult with a US immigration lawyer.
At the tax level, while you will likely have to pay taxes in the US on capital gains, this does not mean that there will not be Canadian taxes to pay. While you can generally credit taxes paid in the US to your Canadian tax bill, a higher tax rate in Canada could mean that you have additional taxes to pay in Canada.
Beasley folders to create if investing in US real estate is part of your plan:
1-Closing documents (ownership documents, property deeds)
2-Closing documents (financial and related expenses)
3-Ongoing (non-operational) expenses related to the home (especially for upgrades and improvements)
4-Follow-up land surveys and tax documents
