The Palm Springs California area (the Coachella Valley, mainly consisting of Palm Springs, Cathedral City, Rancho Mirage, Palm Desert, Indian Wells, Bermuda Dunes, La Quinta and Indio), is a very popular second home destination for Canadians. Our resort lifestyle and weather is a major attraction for people looking to escape the harsh winter of their primary residences. The Palm Springs area is recognized as the golf capitol of the world and also offers a large menu of recreational and entertainment and an immense calendar of social events amidst some of the world’s most beautiful natural topography.
With the economy having impacted our housing market similarly to most other locations, there are some eye-popping deals to be had right now. Add to this that the value of the Canadian dollar (Loonie) is essentially on par with the US dollar, and we have a perfect time for Canadians to purchase second homes here.
Owning Real Estate in America (A Primer)
Types of ownership
• Individual Names (JTWROS, CPWROS, CP, etc.)
– Joint Tenancy and Community Property are easy but potentially subject to US estate tax and probate (talked about later)
– Tenancy by the Entirety is preferred in FL
– Use beneficiary deeds
• Canadian Corporation
– Very common for Canadians
– Avoids US estate tax
– Subject to double taxation
– Required to file non-resident corporate tax return, Form 1120F
– Fair market rent should be paid to the corporation
– Do not use
• Canadian Trust
– Commonly suggested for Canadians
– Avoids US estate tax
– Subject to 21 year rule
– Causes double taxation
– Do not use
• Living Trusts
– Nothing similar in Canada
– Not needed for non-residents, probate can be avoided with beneficiary deeds
• Cross Border Revocable Living Trust™
– For expensive personal residences (>$750k)
– Avoids probate
– Protection from creditors
– Developed by a cross-border attorney
• Limited Liability Company (LLC)
– Not recognized in Canada
– Subject to double taxation
– Do not use
• Limited Liability Partnership (LLP)
– Allows for the limited liability
– Recognized in Canada
– Use when property will be used for business purposes, e.g. rental
– Use LLLP if other than couples are the partners
US Estate Tax
General Rule
• $60,000 exemption for non-resident aliens (NRAs), per person
• Unlimited marital deduction is not allowed for non-citizens
• US taxable estate is net of US debt
• Note – Canadian debt will not reduce US estate
• US/Canada Treaty allows for pro-rata estate tax credit
– Equal to Applicable Exclusion Amount ($3,500,000 in 2009), multiplied by the fraction of US assets to worldwide assets, but not to exceed the amount of US tax
– Taxpayer is required to report worldwide assets
Rental RE Owned by NRAs
• Default 30% withholding on GROSS rents
• Election can be made to withhold on the NET rents
• Depreciation must be taken – Canada does not require
• Will need to file Form 1040NR by June 15th
FIRPTA
• Foreign Investment in Real Property Tax Act of 1980
– If buyer purchases home for less than $300,000 AND intends to occupy the property, withholding is not required on the sales proceeds
– Otherwise, FIRPTA requires 10% withholding on the gross proceeds
– Unless, Form 8288B is filed, then 10% withholding on the “adjusted gain.”
• W-7 – Application for IRS Individual Taxpayer Identification Number (ITIN) should be filed with 8288B
• Canadians do not have the option of deferring taxes in a tax-free exchange or in an installment sale!
*Information provided by Dale Walters, CPA, CFP® (US & Canada)
Keats, Connelly and Associates, LLC
and
Cross Border Tax & Accounting, LLC
