Consider compliance and tax implications on U.S. residences

Renting and selling can trigger financial obligations

As many Canadian snowbirds have discovered, owning property in the United States might offer relief from winter, but it can also produce unexpected financial and compliance headaches for those who don’t take the time to figure out the tax implications.

In short, it’s complicated and involves dealing with the U.S. Internal Revenue Service (IRS) and the Canada Revenue Agency (CRA).

But first, the no-frills example: If you own a Florida condo exclusively for your own use, stay there for just a few months of the year and lock the place up until your next visit, the IRS is unlikely to be interested.

But once you decide to sell or rent, taxation rules and compliance obligations kick in.

Ottawa accounting firm GGFL has many clients with U.S. properties – mostly in Florida – and the firm’s U.S. and cross-border tax principal, Monica Martinez, knows the potential pitfalls.

“Canadians buy U.S. condos because they see this as a better investment than stocks,” she says. “But with the Canadian dollar low, and U.S. property values rising, some are now considering selling.”

Whatever the real estate transaction, navigating the complex U.S. tax system isn’t easy, adds Martinez. But it is essential.

A U.S. non-resident who sells U.S. real estate will encounter upfront withholding taxes. The buyer must generally withhold 15 per cent of the gross sales price at the time of sale – and remit that to the IRS on behalf of the seller.

The withholding taxes can be reduced or eliminated if the seller applies for a “withholding certificate” from the IRS. This allows the withholding tax to be based on an estimate of the maximum tax on the net gain, rather than on the gross sales price.

The seller has to file a U.S. tax return to report the capital gain or loss on the sale, and can claim a refund if taxes previously withheld exceed the final tax liability.

Canadians who rent out their U.S. properties can also be hit with withholding tax - at a rate of 30 per cent of gross rents. The tenant, or property manager, must withhold this tax from each rental payment and remit it to the IRS.

The 30 per cent can also be reduced if the owner elects to be taxed on net rental income instead; by claiming expenses, their tax burden can be reduced but they will have to file a U.S. tax return annually.

Each state also has its own tax regime, although the situation in Florida is less complex because the state has no personal income tax.

As residents of Canada, they must also report the income from the sale or rental of their U.S. property to the CRA. On the brighter side, taxes paid to the U.S. can be credited against Canadian taxes, to avoid double tax.

U.S. real estate investments can be profitable, and certainly offer an escape from Canadian winters, but with the positives comes this complex, specialized area of taxation.

According to GGFL’s Martinez, some Canadians buying, selling and renting U.S. property don’t realize there are tax implications – unfortunately, non-compliance can result in significant tax liabilities and potential penalties.

Her best advice: “Come and see us at GGFL. We can walk you through the tax issues and your compliance obligations, to ensure you are not faced with any unexpected financial consequences. It is well worth it for the peace of mind.”