Take time to determine if your purchase will cause unexpected consequences.
By now it is difficult to find a Canadian who has not heard of the buying opportunity in US vacation homes. The weakness of the US real estate market and the strength of the Loonie combine to make US vacation properties seem like a bargain to many Canadians.
However, before you jump into the investment you should be aware of the tax consequences, because an unanticipated tax bite can quickly turn a sweet deal sour.
Before delving further into this topic, however, it is important to know that the following discussion makes several important assumptions:
- You are purchasing vacation property and not rental property;
- You are not a US citizen;
- You are not, and never have been, a US green card holder;
- You are not domiciled in the US;
- You do not spend more than 121 days per year in the US on average; and
- You do not spend more than 182 days per year in the US.
If any of the foregoing does NOT describe your situation, you may already have US tax issues and should seek experienced US tax counsel.
A. Calculating the US estate tax for Canadian residents If you own a US vacation home, you have US estate tax implications and your heirs may be required to pay US estate tax on the fair market value (“FMV”) of that home at your death. However, because of the tax treaty between the two countries Canadian residents are subject to US estate tax only if the FMV of their worldwide assets (including life insurance proceeds) exceeds the US estate tax credit equivalent (the “Exemption”), and then only the value of their US property is taxed.
In 2012 the Exemption is $5,120,000 but will be reduced to $1,000,000 in 2013 unless the US Congress changes existing estate tax law. In the last six months, both houses of the US Congress have proposed raising the Exemption up to now, although none of the proposed legislation has been enacted into law. Both the Exemption and the applicable tax rates have varied greatly over the years and it is really anybody’s guess as to what the Exemption and the applicable estate tax rates will be in 2013 and beyond.
Tax Free Savings Account has been increased to $5,500.00 for 2013.
