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Blue beach chairs for snowbirds eyeing buying a home in a sunny destination. (Richard McGuirk/Photos.com)
Blue beach chairs for snowbirds eyeing buying a home in a sunny destination. (Richard McGuirk/Photos.com)

Home Cents

Buying a U.S. vacation home? Make sure you know the tax rules Add to ...

The lure of a buying a vacation property in the American sunbelt can be enticing, especially for Canadians suffering through a brutal winter.

There are plenty of compelling reasons to buy south of the border: The Canadian dollar remains strong against the U.S. greenback, and real estate prices are still low.

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And, even if the loonie drops, owning property in the United States can act as a hedge, particularly as the market there is finally showing signs of life with both upticks in sales and new home starts.

What could go wrong? Plenty.

According to Roy Berg, a U.S. tax lawyer based in Calgary with Moodys LLP, there are tax consequences that could quickly turn a vacation dream home into an unexpected money pit.

One thing Canadians tend to forget, he said, is that their purchase could be subject to U.S. estate tax, a risk that can could be avoided or minimized with planning. That means, when you die, your heirs will not only have to shell out U.S. estate tax on the fair market value of that home, they would also be hit with Canadian income taxes.

Another issue, Mr. Berg added, is that Canadians who spend too much time in the U.S. could have their income taxed as if they were U.S. citizens. That’s because if foreigners stay in the U.S. too long, the so-called 183-day rule is triggered. (Stay longer than 182 days, and a Canadian also risks being deported and temporarily banned as an illegal alien.)

California poses a separate set of concerns, since it has its own income tax code and don’t follow the Canadian-U.S. tax treaty. Owning that vacation home Palm Springs could mean being treated just like any other U.S. resident in the state. “We tell people California is a wild card,” Mr. Berg said, “You can inadvertently become a California resident with very little effort.”

And, any Canadians who plan to turn a vacation property into a timeshare or rental property, will face paying U.S. income tax under Internal Revenue Service rules.

Sometimes, Mr. Berg said, Canadians will attempt to pick up a property under a Canadian corporation or “they’ll get cute” and place it into a partnership, which attracts “very bad” Canadian tax consequences.

Others, he said, seek U.S.-based lawyers who will suggest popular purchasing vehicles such as a limited liability company or revocable living trust. “They work great for U.S. citizens, but work badly for Canadians,” Mr. Berg said. “Canada treats these things different and you could be subject to double tax.”

Still, Mr. Berg’s parents just picked up a place in Phoenix for $120,000 (U.S.). A comparable property in a Canadian vacation hot spot – at that price – would be tough to find.

“It’s cheap. It’s so amazingly cheap,” he said.

But, as with many major financial decisions, getting the right advice before taking the plunge is key.

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