When you are looking at your estate plan and read the news, you know that a lot of people in British Columbia are buying vacation homes in America. The people doing the buying are doing well and are looking for property that will do well for them and their heirs in the future. There are a few points to ponder, though, when buying property in the U.S.
If you choose to rent your American home out to defray costs of the mortgage you have incurred, know that you will owe both the American Internal Revenue Service (IRS) and the Canadian Revenue Agency (CRA). The good part is that there is an agreement between the U.S. and Canada that gives you a tax break if you paid the IRS. You can receive a foreign tax credit that reduces your Canadian taxes.
A way to foresee what your tax credit will be is to comply with the 30 percent withholding tax that the IRS asks for. Another way to see this is to realize that most investors don't do this because it doesn't allow them to take full advantage of the deductibles that you can claim if you rent your U.S. home out.
Changing your principal residence can make you a smarter investor. Deciding, based on income from the property, which one needs to be sheltered from capital gains taxes because you plan to sell it soon will be the one you need to claim as a primary residence.
The number "183" needs to be in your mind when you set your American property up for rental income. This is the maximum number of days that you, as a Canadian, can be in the U.S. before you are considered an American citizen. This residency will cause you to pay American taxes on your U.S. property.
Knowing what the American and Canadian law says should be something on your radar. A lawyer on your team, when you have rental property in the U.S., should be another consideration for prudent homeowners.
Source: MoneySense, "Estate planning tips for U.S. vacation homes," Romana King, accessed Aug. 11, 2015