REAL ESTATE: BUY IT AND KEEP IT - What You Don't Know And Need To Know About Investing In The US
Oops, but I didn't know. Nobody told me that I owed the government money. I shouldn't be penalized for this oversight. And penalized you will be - retroactively too. The government has no toleration for excuses. It is your responsibility to maintain your fiduciary obligations to the government with proper tax reporting especially if you are non-resident investor. Claiming ignorance of US tax law is not a valid excuse. That means being properly educated and having the right advisors and mentors on your team.
With the subprime crisis in the United States, the market value of housing has taken a sharp decline. This has prompted a buying frenzy. Sure you can buy undervalued real estate. But at what cost?
US tax attorney Robert E. Ward (rewlaw.biz) specializes in working with Canadians investing in the United States. He outlines some of the opportunities and traps in planning for acquisitions of US properties. He addresses several points such as how to deal with probate taxes, Federal and State estate taxes, avoid double taxation on sale of property, how to qualify for preferential US capital gain rates, address the risk of incapacity, how to protect your heirs, how to limit liability, your filing obligations, how to preserve flexibility and control of your property.
All investment properties owned by Canadians are subject to a 30% withholding tax on gross rental income and a 10% withholding tax on the gross sales proceeds as outlined in the Foreign Investment in Real Property Tax Act also known as FIRPTA. The most common mistake is personal ownership of US real estate. There is US estate taxation and probate when the stakeholder dies before the asset is passed on to the heir. Upon the death of the heir, it triggers US estate tax again and so on and so on. There is no liability protection and no protection for the heirs.
Forming a revocable or irrevocable trust provides the most asset protection although there is no perfect structure. It is up to each individual and their unique circumstances that dictate which structure they will ultimately use. A thorough discussion is required with your US tax lawyer, your Canadian Chartered Accountant and your US CPA.
Ideally, the best way to purchase property is by setting up the trust first and funding the trust; then using the funds in the trust to purchase the property. It is too late to form a trust by the time you have already purchased the property because it will trigger a US Gift Tax which is the same amount as the estate tax.
And it's even worse when you purchase life insurance to solve this estate tax issue because the formula for calculating your US estate tax credit for non-resident aliens is based on the value of your US Assets divided by your Worldwide Assets. Your life insurance policy is added to your Worldwide Assets which increases the denominator and thus, your US estate tax amount also increases significantly. Make sure the life insurance policy is owned by the trust.
Canadians are also required to file up to three separate tax returns per year: one for Canada Revenue Agency, one for the Internal Revenue Service, one for the State in which the property is held. There are five states that do not have state income tax and they are Alaska, Florida, Nevada, Texas and Washington. And filing a 1040NR is absolutely essential. This allows you to claim a tax credit according to the Canada US Income Tax Convention (The Treaty) so that you may avoid double taxation.
As you can see from this brief summary, it requires thorough due diligence to ensure that your assets are protected. What you don't know can be costly for you and your heirs. What you do know now can save you money and peace of mind. If you own properties or are planning to purchase assets in the United States, your best investment is to consult with a US tax attorney. Robert Ward is a boutique law firm with offices in Bethesda, Maryland and Vancouver, British Columbia.
July Ono is a real estate investor, educator, mentor, author and millionaire. She is the Founder of On~The~Beach~Education® Corporation a premier real estate education program designed to empower people to live wealthier sooner by creating passive income through real estate investing. On~The~Beach~Education® Corporation offers a range of seminars, workshops, networking and mentorship opportunities to coach entrepreneurs to create their own financial independence. On~The~Beach~Education® Corporation has successfully helped its students invest in millions of dollars in real estate throughout North America since 2006. http://www.onthebeacheducation.com - http://www.julyono.com