“The chapter being shared on our blogs is titled Florida Specific Issues, from the book Owning US Property the Canadian Way, Third Edition by David A. Altro.
In anticipation of the release of my latest book, which will launch later this Fall, I will be sharing multiple chapters of my two published books in this special blog series. Over the next few weeks I will share some chapters I find particularly relevant or insightful from my two books: Owning US Property the Canadian Way, Third Edition and my most recent book titled Americans Living in Canada – Smile, The IRS is Watching You.
The first chapter I would like to share with you is chapter 14 from Owning US Property the Canadian Way, Third Edition which is titled “Florida Specific Issues” and reviews the cross-border considerations for Canadians to be mindful of before buying in the Sunshine State.
Chapter 14: Florida Specific Issues
Note: figures and statistics are as at time of publication in 2013.
Over the last 60 years, Florida has been a second home to many Canadians. Escaping our brutally cold winters to enter the land of palm trees, sandy beaches and beautiful golf courses just makes sense, doesn’t it?
The low prices of real estate combined with the high value of the Canadian dollar has made Florida especially attractive to Canadians over the last few years. Canadian buyers have contributed significantly to Florida’s rebounding real estate market. Recent statistics show that Canada is Florida’s biggest source of foreign tourists and that Canadians are the state’s number one foreign buyers of real estate. Over 500,000 Canadians now own property in Florida. Fort Lauderdale, Palm Beach, Naples, Sarasota, Fort Meyers, Orlando and Tampa are among the many key geographical areas of interest to Canadians.
Although many issues that we have addressed in previous chapters apply to Florida as they do to other states, below are some of the important issues to look out for when purchasing, or if you already own, real estate in Florida.
Probate
Probate in the United States is the legal proceeding that enables the decedent’s estate to be distributed. The process involves: determining the validity of and admitting the will of the decedent to the probate court, appointing the personal representative, gathering an inventory of the decedent’s assets, publishing notice to creditors in the newspaper, paying all taxes, debts & expenses of the estate and finally, distributing the assets to the named beneficiaries. Probate was described in greater detail in Chapter 3.
In Florida, probate is governed by the Florida Probate Code. According to Florida Statute §733.6171, attorneys can be compensated by up to 3% of the value of the Florida estate for ordinary services. The attorney can also charge extra for any extraordinary service, such as preparation and filling of a U.S. estate tax return, or involvement in a will contest, or proceeding for determining beneficiaries. These extra fees, court costs, publishing costs etc. can run you up to 5% of the total value of your Florida estate.
In addition to the high attorney fees associated with probating your estate, your Florida property will be frozen and your loved ones will not be able to sell, refinance or transfer title of the property until the process is complete or unless additional and costly court petitions are undertaken. This can take anywhere from six to 18 months and can be extremely frustrating for the family of the deceased.
Guardianship
As explained in Chapter 5, incapacity issues are not to be taken lightly. A person is considered incapacitated when they have lost their ability to make important decisions, including those related to their assets or property. Under Florida law, the procedure called “guardianship” may be required in order to determine who can legally undertake the duty and responsibility to make decisions regarding an incapacitated person’s property and assets. This process can take approximately six to nine months and can be extremely taxing on the family, especially when they are already going through such hard times.
Documentary Stamp Tax – Transfer Tax and Tax on Mortgages
Florida is among one of the many states that imposes a tax on the transfer of real property. Documentary stamp tax (A.K.A. doc stamp tax) is levied at the rate of $0.70 per $100 of consideration on documents that transfer interest in Florida real property, such as warranty deeds and quit claim deeds. The Miami-Dade County rate is $0.60 on all documents plus a $0.45 surtax on documents transferring anything other than a single-family residence. This tax is usually paid upon closing, by the seller when the document is recorded. Doc stamp tax is also levied at the rate of $0.35 per $100 of consideration on mortgages that are executed in Florida and on property transferred with mortgages thereon.
What is consideration? According to Florida Statute §201.02, consideration includes, but is not limited to, the money paid or agreed to be paid; the discharge of an obligation; and the amount of any mortgage, purchase money mortgage lien, or other encumbrance, whether or not the underlying indebtedness is assumed.
Therefore, if you are transferring your property to a grantor trust for the purposes of estate planning (like our Cross Border TrustSM), you will not be liable to pay this tax. A transfer of real property by means of a gift will not be subject to documentary stamp tax either, but be careful with gifts as there are other tax implications involved when gifting U.S. property, as described in Chapter 19.
Foreign Investment in Real Property Tax Act (FIRPTA)
Foreign sellers of U.S. real estate are subject to a withholding amount of 15% of the purchase price at the time of sale subject to certain exceptions. This amount may be returned to the seller after proving to the IRS that he/she did not make a gain on the sale or after proving that the capital gain tax owed is less than the withheld amount. Canadians must deal with this inconvenience no matter where in the U.S. they hold property, as FIRPTA is a federal tax act. Fortunately, Florida does not impose any additional withholding tax on foreign sellers.
Florida Income Tax: Individual v. Corporate
Most of the states in the U.S. assess a state income tax on personal income in addition to the federal income tax collected by the IRS. Fortunately, Florida is not one of them. Why does this affect you? It can if you are making income in Florida. For example, if you are declaring income from a Florida rental property that you own personally, you will not have to pay any Florida income tax. Likewise, the state of Florida does not tax individuals or trusts on capital gains.
On the other hand, Florida imposes a corporate income tax rate of 5.5% on top of any federal income tax due. This tax applies to corporations that conduct business or earn or receive income in Florida, including out-of-state corporations.
Florida Land Trust: Problem
A Florida Land Trust is a revocable grantor trust that is specifically created to hold Florida real property. It was adapted from the Illinois Land Trust, which has been used for over 100 years, and whose main purpose is to hold title to vacant land or in land assembly developments to keep the property owner’s identity hidden. Land trusts are unique from both revocable and irrevocable trusts under common law as they vest both legal and equitable title to the real property in the trustee. Additionally, the trustee is given only administrative duties to perform; all other duties are dictated by the beneficiaries.
The Florida Land Trust keeps ownership interest of Florida real estate or other personal property confidential and private because the Florida Land Trust keeps your name off the public record. This can be beneficial for creditor protection as it will be difficult for a beneficiary’s judgment creditor to even discover the beneficiary’s interest in the trust.
Although the Florida Land Trust is an effective way of avoiding probate, there may be double taxation consequences for Canadians if not drafted properly. In addition, it may cause a disposition when transferring your property into the Land Trust, triggering potential federal capital gain tax liability.
Consequently, due to the adverse tax exposure for Canadians, the Florida Land Trust is generally not a preferred entity in which to hold title to Florida personal use residential property, for Canadians.
Recommendation: Cross Border Trust
- Avoids local probate in the County
- Avoids incapacity issues
- Protects inheritance from divorcing spouses/creditors
- Preserves foreign tax credits (on sale/death)
- Reduces and defers U.S. estate tax (QDOT & discounting)
- Banks will provide mortgages on Cross Border Trusts
