Canadians with
US Real Estate
Many Canadians already own US real estate, and given the increasing strength of the US real estate market, many others are contemplating purchasing or selling US property. Investment in US real estate requires careful consideration of the distinct legal regimes in Canada and the US, which can complicate ownership of real estate across the border. Canadians who own US real estate, as well as those entering the US market, rely on Altro LLP to navigate US real estate transactions as well as cross border tax and estate planning issues.
Without proper planning, a Canadian with US real estate may encounter a host of legal issues during his or her lifetime or after he or she passes away. Our professionals analyze the facts specific to each client’s situation in order to recommend and implement a plan for holding title to US real estate.
In order to minimize personal liability and reduce tax consequences, our lawyers consider several factors when assisting clients.
The most advantageous way to hold title to US property depends, for example, on whether the real estate is a personal use or rental property. Many of our clients are also concerned about US laws such as the Foreign Investment in Real Property Tax Act, or FIRPTA. US estate tax and capital gains tax also play roles in determining how to hold title to and transfer US real estate.
Whether our clients already own or are buying or selling US property, we work closely with title companies, outside counsel and other professional advisers as required in order to meet clients’ cross border needs and ensure that transactions run smoothly.
We also help clients settle US estates of Canadians who pass away owning US real property.
Canadians Owning
US Property
Many clients already own US property. Canadians invest in US property for a variety of reasons. Many Canadians regularly vacation in the US sunbelt or enjoy wintering in a warmer climate each year. Others may plan to retire south of the Canadian border. Still others choose to invest in US real property to generate rental income. With relatively affordable US housing prices and the strengthening Canadian economy, purchasing investment property in the US is becoming more and more common.
There are several issues for Canadian owners of US real estate to consider. Issues vary depending on whether the property is owned for personal use or investment purposes.
Those Canadians who hold title to US vacation property in their personal names, for example, may expose themselves to cross border issues, particularly if they own US property while incapacitated or upon death. Legal headaches such as probate and guardianship proceedings, as well as taxes like US estate tax, can often be alleviated by holding title to US property in a customized ownership structure tailored to one’s individual needs, such as a cross border trust.
Similar concerns exist for Canadians who own investment or rental property, but there are additional issues to consider as well. Canadians who rent their US property are exposed to liability; tenants have the ability to sue for extensive damages in the litigious US. Creditor protection therefore becomes a concern for those Canadians who own US property for investment purposes. Strategies for paying income tax at the most advantageous rate while preserving foreign tax credits are also important.
Altro LLP lawyers take all of these factors into consideration when analyzing clients’ current ownership structures.
One common consideration is probate. Owning US real estate raises the red flag of probate. Probate is the legal procedure required to transfer title of US property to children or beneficiaries upon death. In Florida, for example, probate can cost up to approximately 3% of the value of the Florida estate upon the date of death. It is also time consuming and freezes the estate.
It is also possible that a Canadian will become incapacitated while owning US property. Guardianship proceedings are legal proceedings in which a court may make a finding of incapacity and appoint a guardian to exercise decision-making rights that were removed. Guardianship proceedings require legal representation and can be costly.
Canadians who own US property may also be subject to US estate tax. This tax is based on the fair market value of all US assets owned at the time of death. It can climb up to 40% depending on the value of the US asset and the value of the worldwide estate. Only Canadians who exceed the worldwide estate exemption are subject to US estate tax. This exemption varies with inflation and can change drastically when new laws are passed in the US.
In order to eliminate or minimize the burden of US estate tax, incapacity hearings and probate, Altro LLP lawyers may recommend that clients own US property other than in their personal names, such as in a revocable cross border trust.
We also help clients navigate the tax and immigration issues that concern them. One major issue is the number of days clients can spend in the US per year without jeopardizing their citizenship and residency status for the purposes of immigration, income taxation and health care.
The number of days Canadians are allowed to spend in the US varies with respect to each of the above issues, and the rules are complex. Our lawyers and cross border experts guide clients to help prevent complications that can arise from frequent travel between the US and Canada. Spending too many days in the US, for instance, can result in loss of Canadian medical insurance or being deemed a US resident for tax purposes.
Altro LLP’s cross border expertise offers clients assurance that their US estate plan aligns with both Canadian and US law. We are dedicated to client service so that Canadians who own US property can vacation or retire south of the border with enjoyment and ease.
Altro LLP lawyers assist clients by tailoring estate plans to suit their individual needs. One common consideration is probate. Owning US real estate, regardless of its purpose, raises the red flag of probate. Probate is the legal procedure required to transfer title of US property to children or beneficiaries upon death. In Florida, for example, probate can cost up to approximately 3% of the value of the Florida estate upon the date of death. It is also time consuming and freezes the estate.
It is also possible that a Canadian will become incapacitated while owning US rental property. Guardianship proceedings are legal proceedings in which a court may make a finding of incapacity and appoint a guardian to exercise decision-making rights that were removed. Guardianship proceedings require legal representation and can be costly.
Canadians who own assets in the US may also be subject to US estate tax. This tax is based on the fair market value of all US assets owned at the time of death. It can climb up to 40% depending on the value of the US asset and the value of the worldwide estate. Only Canadians who exceed the worldwide estate exemption are subject to US estate tax. This exemption varies with inflation and can change drastically when new laws are passed in the US.
In order to eliminate or minimize the burden of US estate tax, incapacity hearings and probate, Altro LLP lawyers may recommend that clients own US property other than in their personal names, such as in a revocable cross border trust.
However, while owning US property in a cross border trust is beneficial in many cases, if clients rent their property to tenants, they must also consider liability and creditor protection. For instance, if a tenant injures him or herself on the property, he or she can sue in the US. If a tenant’s suit is successful, clients need to protect their assets in Canada. For maximum creditor protection, our lawyers may recommend owning a US rental property in a limited partnership or cross border irrevocable trust structure.
Our lawyers also have expertise helping clients alleviate the impact of withholding taxes levied by the IRS at a rate of 30% of gross rental income. This amount can be reduced in certain circumstances. Altro LLP also assists clients by recommending and implementing ownership structures that preserve foreign tax credits, thereby avoiding double taxation.
Regardless of the structure required to suit clients’ needs, Altro LLP prides itself on implementing estate plans that protect our clients’ assets both at home and stateside.
Canadians Buying/Selling
US Property
Our team specializes in representing clients who are purchasing or selling a US property. There are specific considerations that make buying and selling in the US different than buying and selling in Canada. Our main goal is to ensure clients’ interests are protected and to smooth any bumps along the road during the transaction.
In the US, title companies play a major role in handling real estate transactions. In addition to completing title searches, title agents prepare important closing documents, such as warranty deeds and settlement statements. However, obtaining legal representation for US real estate transactions is still beneficial.
Our lawyers review purchase contracts on behalf of clients, help clients explore financing options, review title insurance commitment and other closing documents prepared by title companies and also draft closing documents for clients. We also leverage our cross border tax and estate planning expertise to ensure that title is taken in the optimal structure to minimize legal and taxation issues upon sale or death, such as the cross border trust.
Canadian sellers of US real estate must also consider whether the Foreign Investment in Real Property Tax Act, or FIRPTA, is applicable to their transaction. Generally, FIRPTA applies to the disposition of US real property by foreign owners although there are several exceptions to its application. If FIRPTA applies, Canadians who sell US real property may be subject to a 10% withholding of the purchase price by the IRS. There are ways, however, to reduce or eliminate this withholding even if FIRPTA applies.
Regardless of whether clients require legal representation to review and prepare closing documents, explore financing options or navigate laws such as FIRPTA, our lawyers are here to guide clients purchasing or selling US property.
While title companies in the US complete title searches and prepare legal documents for real estate closings, they do not represent a buyer’s or seller’s interests. A real estate lawyer, however, assists a buyer or seller by keeping his or best interests in mind when reviewing a title company’s work. Our lawyers review closing documents to ensure that clients’ transactions are completed correctly.
Additionally, our lawyers liaise with title companies to coordinate transactions so that they run smoothly. With our multi-jurisdictional offices, clients are able to close in one of our Canadian offices in Toronto, Montreal, Calgary or Vancouver.
If complications arise during a transaction, our lawyers negotiate on behalf of clients to resolve issues and ensure that deals close successfully.
We also advise on the most advantageous way to hold title to US real estate. Although title agents prepare legal documents, they do not provide legal advice regarding holding title to US real property. Many Canadian clients who are purchasing US real property contemplate taking title in their personal names. Owning US property in one’s personal name, however, can lead to unwanted and costly problems upon one’s passing. Personal ownership of US real estate can also expose clients and their families to liability and tax issues while clients are alive. Having legal representation instead of relying solely on title companies ensures that Canadians own their US property in the most beneficial way.
There are also several tax issues that arise in US real estate transactions, such as capital gains upon sale. Our team assists clients in ensuring that title is held in a way that allows them to retain US tax credits on sale. This prevents against double taxation in Canada.
Our lawyers have been called to the Florida Bar, State Bar of California, New York State Bar Association, and the State Bar of Texas and are certified as foreign legal consultants with specialized expertise in representing Canadian clients who are buying or selling US real estate.
It is important to understand that FIRPTA is not an additional tax. The purpose of FIRPTA is to ensure that the IRS receives capital gains tax that may be due from foreign sellers who dispose of US real estate. The amount withheld is reconciled when a seller files his or her US tax return reporting the income earned on the sale. If the amount of withholding exceeds the amount of capital gains tax required to be paid to the IRS, the IRS will refund the difference.
If FIRPTA applies, a Canadian individual who sells US real property may be subject to a 10% withholding of the purchase price by the IRS. There are ways, however, to reduce or eliminate withholding under FIRPTA. If a seller can prove, for example, that his or her adjusted cost basis will reduce or eliminate his or her capital gain so that it amounts to less than 10% of the sale price, a special application can be made to the IRS asking for a reduction or exemption from FIRPTA.
Our professionals have extensive experience navigating the complex FIRPTA rules. We frequently prepare successful applications to the IRS to assist clients in receiving reductions in withholding or exemptions from FIRPTA. We then work with title companies and buyers to ensure a smooth sale. We also help sellers receive early returns of funds withheld under FIRPTA. Our goal in all circumstances is to analyze our clients’ individual needs and implement the most advantageous plan for complying with FIRTPA so that clients can retain the maximum amount of gains immediately upon their disposition of US real property.
Settlement statements are financial breakdowns of real estate transactions. They detail the funds a buyer owes on closing as well as the amount a seller will receive, taking all credits and charges into account. Settlement statements contain common credits to buyers like the amount of a buyer’s deposit; reductions for items to be paid by seller, such as county taxes that may become due for that portion of the tax year for which a seller owns the property prior to the closing date; and charges such as fees due to the title company for its work. Our lawyers have extensive experience reviewing settlement statements. They verify all financial information so that buyers can comfortably wire funds on closing and sellers can rest assured that they will receive the correct amount of closing funds.
Warranty deeds are the official documents that transfer title between parties. Once a deed is recorded in a county’s records, title legally vests in a buyer. Deeds contain detailed legal descriptions of the property being transferred as well as vesting language that reflects how title to property will be taken, such as in a trust or other entity. Warranty deeds also contain language stating that sellers warrant to having free and clear title to the property being sold. Altro LLP lawyers ensure that deeds contain the correct vesting language and legal descriptions, as well as the most fulsome warranties.
Another important real estate document is a title insurance company’s commitment to provide title insurance to the buyer upon closing. This document contains exceptions to title insurance coverage, such as easements on the property, as well as requirements that must be met prior to closing in order for insurance to ultimately be provided. Altro LLP lawyers confirm that all requirements for title insurance are met prior to closing and that all exceptions to title insurance are standard.
There are several other real estate documents that our lawyers review and prepare, including purchase contracts and various affidavits. Our lawyers carefully guide clients through the execution of these documents upon closing. In addition, with our multi-jurisdictional offices in Canada, our clients have the ease of executing real estate documents close to home, knowing that their interests have been protected.
Settling a US Estate
Altro LLP often assists executors settle the US estate of Canadians who pass away with US real estate.
Canadians who pass away owning US real estate in their personal names may be subject to probate. Probate is the legal procedure required to transfer title of US property to children or beneficiaries upon death. In Florida, for example, probate can cost up to approximately 3% of the value of the Florida estate upon the date of death. In California, another popular state in which Canadians own US property, statutory probate fees are based on the value of the estate; the higher the value of an estate, the higher the probate fees. In addition to real estate, US assets such as US funds held in US bank accounts on the date of death, may need to be probated. In all states, probate can be costly and time-consuming. Probate also freezes the estate. In order to minimize personal liability and reduce tax consequences, our lawyers consider several factors when assisting clients.
Settling a US estate requires the filing of various forms and affidavits. Altro LLP prepares and files all necessary affidavits and filings for clients, including IRS Form 706-NA, the US estate tax return. The filing of a 706-NA is used to compute estate and generation-skipping transfer (GST) tax liability specifically for non-resident US decedents. The estate tax is imposed on the full amount of US assets based on their fair market value. This form must be filed, if, at the date of death, the value of the decedent’s gross estate located in the US exceeds $60,000.
Legal headaches such as probate can be prevented by holding title to US property in a customized ownership structure, such as a cross border trust, rather than in one’s personal name. If a US property is held in trust, then there is no will that needs to be probated upon death; the trust contemplates the distribution of property among beneficiaries upon death, so there is no need for a will.
Altro LLP is here to assist both executors of Canadians with a US estate as well as trustees requiring guidance on managing the distribution of US real property held in trust when a loved one passes.
MEET YOUR LEGAL TEAM
Kindly complete the following form and we will promptly respond to your inquiry to arrange a consultation with a professional from our legal team.