US Property & Inheritance

by Tax Guy - Burlington Accountant on November 21, 2008 Print This Post Print This Post

Question: “I have an aunt in the US who has a house currently worth $600,000.  My aunt plans on leaving me the house as part of her estate.  However, she has presented an opportunity to transfer ownership to me while she is living.  In either case, I plan on selling the property when my aunt passes away.

What is my best option, i.e. inherit or transfer now?  What are the tax implications?  I don’t spend a substantial amount of time in the U.S. (less than 30 days).”

The situation you describe involves international tax and legal title considerations and requires the involvement of competent professionals who can help structure the transfer in the most efficient manner possible.  That being said, I will provide some general commentary on the situation with the understanding that I can only provide general U.S. tax information but am on an expert on U.S. taxes.

It is helpful to understand the issue from a U.S. perspective and from the perspective of your aunt.

Unlike Canada which deemed that a deceased person is to have sold their property immediately before they died and does not have any gift taxes, the U.S. currently has both a gift tax and estate tax system.

The U.S. gift tax system provides a general lifetime exclusion of $1 million but this rule will be automatically repealed in 2010.  In 2010, the gift tax will revert to the old system and the highest marginal tax on gifts will be 35% unless the U.S. government takes further action.

The U.S. estate tax regime essentially provides for a general exclusion of the first $2 million of the estate in 2008 and $3.5 million in 2009 with tax levied at 45% on amounts in excess of those exclusions.  After 2011, the old system kicks in and there is a general exclusion of $1 million and a tax of 55% on amounts in excess of the excluded amount.

From this perspective, your aunt should seek professional advice as to the best alternative for her.  The transfer of ownership may carry some unintended risks for her, as the property is no longer hers it may be subject to claims incurred by credits or others should you run into financial difficulty or get divorced.  See the links below.

In your case, the situation is straightforward.  Under Canadian tax rules, both gifts and inheritances are considered to come from after tax proceeds and there are no immediate tax implications on receipt.  The adjusted cost base of the property is deemed the fair market value of the property on the date it was received and a capital gain or loss will result on the subsequent sale depending on the proceeds received.  The gain will be taxable as any other gain (1/2 included in income) but any losses are deemed to be nil, because the property will be deemed to be personal use property.

You would also face U.S. taxes on the disposition.  A general non-resident tax of 30% is levied on the net gain and may be reduced by treaty to 15%.  In Canada, a foreign tax credit may be claimed for the U.S. tax withheld and is the lesser of either 15% of the gain or the actual amount of tax paid.

You have some planning that needs to take place to ensure the receipt and disposition of the property is appropriate planned.
Here are some links that you and your might find helpful:

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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