The United States housing market crash of 2008 brought on heavy heartache, discouragement and depression to property owners throughout the country. If you are a Canadian resident who owns U.S. real estate in a corporation, there is an opportunity for you to benefit from this unfortunate crisis.
One major disadvantage of holding U.S. property in a corporation is the extremely high capital gain tax rate. The U.S. capital gain tax rate is 35%, plus an additional 5.5% if the property is in Florida. (This additional rate varies from state to state.) Capital gain tax will be triggered the moment you sell your property out of the corporation and into a new structure. Generally, the fair market value of real estate has been at a standstill since the 2008 crash. Property values have not yet begun to rise, but we suspect that they will over the next few years. It is up to you to take advantage of this opportunity while property values are still low. In order to save the high U.S. corporate capital gain tax of a future sale with profit, you may want to consider selling your property into a more tax efficient structure sooner rather than later in order to benefit from lower capital gain tax expenses.
The other major disadvantage of using the corporation as a home for your property is the shareholder benefit rule. As of January 1, 2005, the Canadian Revenue Agency charges a taxable benefit to shareholders using a corporate asset for personal use, e.g. a U.S. vacation home. This means that the rental value of the property will be added to the shareholder’s income, and consequently taxed. Only properties that were purchased prior to January 1, 2005 are grandfathered into the old rule and exempted from such a tax. If you have purchased a vacation home using a corporation after this date, you must declare this extra income and as such will be taxed. Take the time to evaluate your situation, as selling your property out of the corporation may be your ticket to avoiding the shareholder benefit rule as well as a large capital gain tax.
You’re probably wondering if the hassle of selling your property from the corporation to a new structure is worth it. The process itself can seem a little overwhelming at first. Consulting with a Cross Border Specialist will put you at ease as they explain each step of the process to ensure a seamless transition.
Whereas the corporation allowed you to own U.S. property without worrying about probate, incapacity issues or U.S. estate tax, discussing the matter with one of our Cross Border Specialists will allow you to explore various strategies in order to establish a more tax efficient ownership structure, while preserving the same advantages. They will help you to file the necessary paperwork, create the new structure, and sell your property from the corporation to the new structure.
There are two important costs in this process that cannot go unmentioned; 10% FIRPTA withholding (Foreign Investment in Real Property Tax Act – Section 1445 of the Internal Revenue Code), where a non–U.S. resident sells U.S. real estate, and documentary stamp tax, also know as transfer tax. While FIRPTA can be avoided completely by filing for a withholding certificate, transfer tax cannot be avoided, as it is triggered the moment any U.S. property is sold.
If you are in a situation of owning your U.S. property in a corporation, now is the time to explore your options. There’s no time like the present!
