Articles Posted in Cross-Border Taxation

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One of the perennial questions my Canadian clients ask me is how they should take title to their US real estate, usually a vacation home.  My answer is, it depends on a number of considerations, but the right choice probably involves a revocable trust specially drafted to hold US real estate.  But in any case, some thought has to go into the decision.  Thousands of dollars may be at stake if the wrong method of title is used.  The choice shouldn’t be made casually while signing escrow papers, which regrettably often happens.

The best way for Canadians, and foreign nationals in general, to hold US real estate depends on their plans for the property, its value, the owner’s age and net worth, whether the property has appreciated since it was purchased, the expectation of rental income, and what issues loom large for the owner (avoiding probate, escaping the US estate tax, selling the property with a minimum of capital gain, limiting personal liability).  Let me go over the basics.

  1. The Probate Issue.  A probate in Canada can’t transfer real property located in the US to the decedent’s heirs.  Neither a California court nor the local county recorder will recognize foreign court orders when it comes to US real estate.  So, if you are a Canadian and you own a vacation home in California in your individual name (or both the names of you and your spouse), when one of you dies you will have to probate the real property (the exception is property held in joint tenancy, discussed below).  Another probate will be required when the surviving spouse dies if the spouse hasn’t sold the property.  Probate is the process whereby a court oversees and orders the transfer of assets from a decedent to the decedent’s heirs.  Like any court process it tends to be time consuming, public, and involves significant attorney’s fees.  Most foreign nationals are wise to try to avoid it.
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Helped along by the depressed US housing market in the past few years, the Palm Springs, California, area has become a hot spot for Canadians to purchase vacation homes or rental property. Often the same property is used for both purposes: vacations for snow-weary owners, and rentals when they go back to Canada. With the year about to end, it’s a good time to go over the basic tax rules for Canadians who own or rent real property in California.

Assuming the Canadian owner doesn’t have a green card or hold other residency status, the tax implications of owning real estate in the US will depend on how the property is used and how often it’s used.

If the property is solely used as a vacation home – and never rented out during the year – there should be no US tax implications until the house is transferred, either by sale, retitling into a trust or business entity, or at the owner’s death. In our wireless connected world, Canadians who mix vacation with work while at the property need to be careful about running afoul of US federal and California state income tax rules, especially when it comes to the very aggressive California tax authorities and their rules about California source income. But that’s another topic.

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More on When We Use the Canadian Irrevocable Trust to Purchase US Property…

So we pick up where we left off last week: super-wealthy Canadians who own more than $5.34M in worldwide assets, and who loathe the idea of paying a US estate tax, should consider (1st and foremost) putting the US house into a Canadian Irrevocable Trust. You can do this with relative ease if the trust owns the house from the inception. But be careful for the scenario where the Canadians own the house individually at first, and then transfer (usually via a sale) the house to a Canadian Irrevocable Trust later. This is thought by some (but by no means all) practitioners to subject to the Canadians to the US gift tax (even though it’s a sale). I’ve yet to see any evidence of this, except for indirect case law from 50 plus years ago, so who knows. Nonetheless, Canadians transferring a US house to a Canadian Irrevocable Trust after owning it individually first (as opposed to when the trust buys the US property first) should remain mindful they are taking a risk, and that IRS may impose a gift tax on this transfer (sale). Call us at Sanger and Manes (760-320-7421) to discuss the Canadian Irrevocable Trust for California (and especially) Coachella Valley properties. This is a highly complex cross-border estate planning area, but Sanger & Manes can help.

For the vast majority of Canadians purchasing US real estate, the biggest concern is not the US estate tax, it’s the excessive cost and time required for a Canadian’s heirs to inherit their parents’ California real estate- i.e. the cost of probate (the California process whereby a California court orders the Canadian snowbird’s US house to be distributed to their designated beneficiary(ies)).

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Summer allows us a little break in our Palm Springs law office, and it also allows us to take a break from our blogs. But as Fall is now upon us (and it is gorgeous outside, trust me), it’s time to get back to business. We get a a lot of questions about the probate process here in California (something our Firm gets involved in regularly), and how it may differ when the deceased was not a US citizen/ resident.

Before We Describe the Probate Process, Remember, Your Estate Will Save Time and Money if You Put Your House in a Trust While You’re Living

California probate is a both time consuming (think 8 months to over a year to complete…) and costly (the family of a deceased will have to pay attorneys approximately 3% of the value of the property being probated in California…plus extra costs as well associated with the estate tax return of the estate and even potentially other costs). On the other hand, property placed into a valid trust (under California law) does not have to go through probate, which generally saves the estate thousands of dollars and speeds up the process by which the heirs receive the property considerably. Sanger and Manes drafts trusts for Canadians owning Palm Springs area real estate (and all of California property generally).