David A. Altro and Matt C. Altro are regular contributors to Paul Delean’s business column in the Montreal Gazette, please scroll down to read David and Matt’s answer to the reader question.
Tax strategy: Liquidating U.S. inheritance can be tricky
Tuesday, September 3, 2013
How to liquidate a U.S. inheritance was among the topics raised in the latest batch of reader letters. Here’s what they wanted to know.
Q: “Along with several members of my family, I recently inherited a house and IRAs (individual retirement accounts) from a family member in the U.S. If we sell the house and cash in the IRAs, what tax exposure do we have? What’s the best approach to minimize taxes?”
A: David Altro of Altro LLP, a specialist in cross-border transactions, cautions that before selling anything, it’s important to ensure that proper filings were made with the Internal Revenue Service in the U.S. to settle the estate: “The IRS may have placed an estate-tax lien on the property pending the filing of an estate tax return, which would prevent any transfer of real estate.”
If everything’s in order, a sale can proceed. “Both Canadian and U.S. tax rules generally allow the beneficiary of an estate to receive inherited property at a cost basis equal to the fair market value at the time of death,” Altro said, so that only the appreciation (if any) in the value of the property from death to actual sale gives rise to a taxable capital gain. That tax is payable in both countries, but you’ll get a credit on your Canadian return for any capital-gains tax paid in the U.S.
“Regardless of whether there is a gain or not, the sale of the home will be subject to the Foreign Investment in Real Property Tax Act, which imposes a withholding requirement on the sale of real estate by a non-U.S. resident,” Altro noted. That’s 10 per cent of the gross price, to be withheld by the closing agent and remitted to the IRS as a deposit against capital-gains tax.
Any amount in excess of taxes due eventually gets refunded when the required income-tax returns are filed with the IRS. There are exemptions, such as when the sale price is less than $300,000 and the buyers are willing to certify they intend to use the property primarily as a personal residence for the first two years of ownership, Altro said. In that case, nothing needs to be withheld.
As for the IRAs, Matt Altro of MCA Cross Border Advisors Inc. says you have two options: withdrawing the money as a lump sum or leaving the funds in the inherited IRA and taking required minimum distributions. “If you withdraw as a lump sum, the IRS will apply a withholding tax of 20 per cent, and Canada (and Quebec) will tax the money received as income,” he said. At least you’ll get a tax credit for what the U.S. kept. If you opt to leave the money in the IRA, you’ll have to start taking the minimum distributions by Dec. 31 of the year after the original owner’s death.
“The main benefit of leaving the money in the IRA is that the IRS and (Canada Revenue Agency) will allow you to continue to defer tax on funds in the account, provided the appropriate filings are made,” Altro said. “If you are relatively young and you don’t need the money, you may be able to stretch out the tax deferral on the IRA for many years.” For multiple beneficiaries, proceeds can be divided into separate accounts to maximize the tax deferral.
There are issues other than tax deferral to consider, including currency risk, potential restrictions on the choice of investments and exposure to U.S. estate tax. Professional advice is recommended to ensure you fully understand what’s involved, he said.
The Gazette invites reader questions on tax, investment and personal finance. If you have a query you’d like addressed, send it to Paul Delean, Gazette Business Section, Suite 200, 1010 Ste. Catherine St. W., Montreal, Que., H3B 5L1 or to by email to email@example.com