In Canada, home values have been constantly rising for many years now, and this overheating of the real estate market shows no signs of abating. In this environment, the idea of owning a home abroad could become a very attractive option. Not to mention that our harsh winters often entice people to consider living elsewhere.
What factors should you take into account if you are thinking of buying a home abroad, particularly in the United States?
To your calculators!
Since you are still a Canadian resident, you will first have to plan your stays in the United States as well as your absences from Quebec. If you expect to be outside the province for a good part of the year, it will be important to keep track of the days spent away and to keep a record of your absences of more than three weeks’ duration.
If, during the current year,
- You intend to spend 183 days or more in the United States, or
- If you have spent more than 30 days of the current year there and the number of days spent there this year, added to one third of the days spent there the previous year and one sixth of the days spent there two years ago, totals 183 days or more, you could be considered a U.S. tax resident, or at least be required to fill out Form 8840.
This status obliges you to meet certain requirements, including the need to complete forms and declarations.
To remain registered with the Quebec health insurance plan (RAMQ), you cannot be away more than 182 days between January 1 and December 31 in a given year. However, if your absences last less than 21 days, you are not required to include them in the count.
When buying a home in the United States, many financing options are available. However, there are significant differences between American and Canadian mortgage rules and terms.
- To avoid problems related to exchange rate fluctuations, you could obtain financing for your purchase from a financial institution in the United States.
- Paying cash or financing with the equity of a home in Canada could also be considered.
Fluctuating exchange rate
During the time you own your home, you should keep in mind that the exchange rate could have implications, particularly with respect to expenditures.
When selling the home, the exchange rate will have to be taken into account in the calculation of taxes on the transaction dates (i.e. the purchase date and the selling date), or with regard to any other receipts or disbursements. This means that, even if the value of the home did not increase in U.S. dollar terms, you could be in a gain situation in Canada if the U.S. dollar exchange rate is higher on the selling date than it was on the purchase date.
Thinking of renting your home?
When you return to Quebec, you could rent your home in the United States. As a Canadian tax resident who earns rental income abroad, you will have to include your rental income and expenses on your Canadian income tax return.
In the United States, non-residents are subject to a 30% withholding tax on gross rental income. However, it is possible to be exempted from this withholding and be taxed instead on net income. In this case you will have to file a tax return (1040NR) in order to declare your rental income and expenses.
Whichever option you choose, you will be able to claim a tax credit in Canada for the amounts of tax you paid to the U.S. Internal Revenue Service (IRS).
When you sell...
As a non-resident who sells a property located in the United States, you may have to pay an administrative withholding tax of up to 15% of the selling price (before expenses) at the time of the transaction. To reduce this withholding, you could apply for a certificate from the IRS if it is estimated that the tax you will have to pay on the sale will be less than the amount of the withholding.
Note, however, that apart from the withholding, you will have to file a U.S. income tax return for the year of the sale. The capital transaction will also have to be declared in Canada and, if there is Canadian tax payable, you will be able to claim a tax credit for the U.S. tax paid.
If you live in the home, you can designate it as your principal residence and request a capital gains exemption. If you own several residences in which you normally live during the year, it would be preferable to do an analysis to determine which one should be designated as your principal residence in order to optimize your exemption.
Repercussions upon death
Don’t forget to take into account the potential consequences in case of death:
- It is advisable to have a U.S. will for properties owned in the United States in order to facilitate the transfer to your heirs.
- U.S. estate taxes will have to be considered if the value of all the properties owned in the United States exceeds US$60,000 and if the value of your properties worldwide is greater than US$11,180,000.
- The U.S. federal estate tax is gradual and can reach 40%. Some states also levy estate taxes, so find out about this.
Buying a home in the United States could prove to be a good investment, but you must be properly informed. Since the transaction is made in another country, it’s important that you know not only the Canadian rules, but also the U.S. tax and legal rules that will impact your property.
To know all the repercussions of this transaction on your wealth, speak with your advisor at the Financial and benefit from his expertise and that of our tax specialists. You can then embark on this new adventure well informed and without any nasty surprises at the end!
Benoit Chaurette, M.Fisc., F. Pl.
Manager, Professional Practice