Canadian tax implications of cross-border real estate shopping

It’s hard to resist the temptation of an excellent bargain. With that being said, their are implications beyond the pricetag. A recent article in the Globe and Mail scratches the surface of what needs to be considered before going south on a real estate shopping expedition…

“It’s important for the Canadian to have a clear understanding of what their overall objective for buying the property is,” says Terry Ritchie, a financial planner with Transition Financial Advisors Group, and co-author of The Canadian Snowbird of America. His firm specializes in cross-border financial planning.

If the property is being used for personal reasons, there are generally no annual U.S. or Canadian income-tax implications until the real estate is sold or rented out.

Tax reporting kicks in when the property is used for investment purposes. Landlords must file a U.S. income-tax return every year and can deduct any reasonable expenses from the rent they receive, says Mr. Ritchie. If you and your spouse are joint owners, then you both must file a return by June 15 of the year following the rental activity.

You’ll also have to think about the cost of depreciation on the property, which is mandatory under U.S. tax laws. “In many cases, when depreciation is factored against the other expenses, most Canadians might see a net loss for U.S. tax purposes,” Mr. Ritchie says. Loss or not, you still have to file a return.

Once you sell your real estate, you may also have to file a state tax return, depending on where it is. You could also face a 10 per cent federal withholding tax on the proceeds, though that may be reduced. You can claim a reduction or an elimination of the tax entirely, for example, if you sold at a loss. You’d have to file separate forms to get that money back from the government.

And it doesn’t end there: Your estate may also need to pay U.S. estate taxes. However, most of us won’t have to worry too much about this as it generally only applies if your worldwide estate is over $5-million individually or $10-million as a couple.

Read the full article here…

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