With the strong Canadian dollar and a depressed U.S. real estate market, you may be considering purchasing vacation property in the U.S. and spending some time in a sunnier locale. It also may sound like a good investment opportunity. However, before jumping in with both feet and purchasing property be aware that you may be subject to U.S. tax and filing requirements.
Canadian Tax Implications
In Canada, the purchase of vacation property (regardless of where the property is located) by residents of Canada is considered to be personal use property. You may acquire the property and hold it for as long as you wish without any tax implications (provided you do not rent it out). When the property is sold you will be required to report the gain as a capital gain. If you incur a loss, your loss is deemed to be nil and therefore cannot be utilized.
If you rent the property out, from a Canadian perspective, the income is taxable in Canada and reasonable expenses incurred to earn the income may be deducted including capital cost allowance and interest paid on the mortgage. However, the deductions allowed are limited to proportion of time the property was rented compared to when it was used for personal purposes.
If you spend a substantial amount of time in your U.S. vacation property you may be deemed to be a resident of the U.S. despite the fact that you are also a resident of Canada and paying Canadian taxes. The U.S. will consider you a resident of the U.S. if:
- You have been in the U.S. for more than 30 days in the current year, and
- The weighted total number of days you were in the U.S. (based on the formula below) is 183 days or more.
Number of days in the U.S. this year + 1/3rd of the umber of days spend in the U.S. last year + 1/6th of the number of days spent in the U.S. the year before last.
If you are considered a resident of the U.S. for tax purposes you are subject to U.S. tax and filing requirements in addition to be required to pay and file Canadian taxes.
If you fall into one of these categories there may be relief under the Canada-U.S. Tax Treaty or under U.S. tax law.
If you rent out the property, the rent you receive is subject to a 30% withholding tax that the tenants are required to deduct and remit to the IRS regardless of whether the tenants are from the U.S. or Canada. You may be able to deduct certain expenses related to the rental property and will be required to file a U.S. tax return.
Property in U.S. may have certain U.S. estate tax consequences and currently there is some uncertainty as to the status of the estate laws in the U.S.
It is highly advisable to engage the services of a cross-border professional before making any concrete decisions about making a purchase. The specialist can explain fully the consequences of your plans and can help you appropriately structure your purchase and minimize potential unforeseen liabilities.
This information is intended for general information only and should not be relied on as a substitution for professional advice. Any tax advice that may be contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions or promoting, marketing or recommending to another party any tax-related matters addressed herein.