Q: I live in Canada and am a Canadian citizen. If I purchase a property in the United States will I be subject to United States taxes?
A: Yes. If the US property which you own is rented, you will be subject to US income taxation on the rental income. Even if you use the US property exclusively as a vacation residence, any US property owned at death will be subject to US estate taxation.
Q: How can I be subject to US income taxation when the expenses I am paying (for example, real property taxes, maintenance and upkeep, and mortgage interest) exceed the rental income I receive?
A: Absent special election, rents received by a person who is not a citizen or resident of the United States are subject to a withholding tax imposed at a 30% rate on the gross rental income (without reduction for otherwise deductible expenses associated with the property).
Q: How can I avoid the 30% withholding tax?
A: The United States revenue laws allow owners of US real estate who are not citizens or residents of the United States to elect to be treated as engaged in a US trade or business. The election creates an annual obligation to file a US income tax return but allows the non-US investor to compute his or her US income tax liability on a net basis (reducing gross rental income by deductible expenses including depreciation).
Q: If I do not lease or rent my property to others, do I have any US tax obligations?
A: Yes. If at your death you own US real estate, you will be subject to a US estate tax.
Q: How is the US estate tax different than the tax which I pay to Canada at my death?
A: US estate tax is different in many respects from Canada’s deemed disposition at death tax. Two of the most important differences are, first, the rates at which US estate taxes are imposed: Federal rates range from 18% to 45%, plus the state in which the property is located may also impose a state estate tax. Second, US estate taxes are assessed on the entire fair market value of the property. In contrast, Canada’s deemed disposition at death tax only taxes the gain that would be realized if the property were sold.
Q: I can avoid the taxes that I would otherwise pay to the Canada Revenue Authority at my death simply by leaving the property which I own to my spouse. Will this avoid US estate taxes, as well?
A: No, unless your spouse is a US citizen.
Q: Are there any strategies which will allow me to avoid US estate taxes?
A: Yes. However, taking advantage of these strategies requires planning. In order for that planning to be successful, in many cases it must be undertaken before the US property is purchased.
Q: How can I find out what I should do to avoid US income taxes and US estate taxes?
A: It is imperative that you consult a tax advisor experienced in US tax matters, preferably a lawyer or accountant with a practice based in the United States that advises non-US persons regarding ownership of US real estate.