CANADIAN AND FOREIGN INVESTMENT IN U.S. REAL PROPERTY
This topic is particularly timely given the relative strong Canadian dollar and diminished U.S. dollar within the currency markets, the significant drop in the value of U.S. real estate, and the existence of favorable mortgage rates. Furthermore, there is a push to eliminate certain provisions of the Foreign Investment in Real Property Tax Act (“FIRPTA”). FIRPTA was enacted in 1980 to discourage foreign investment in U.S. real estate in order to reduce demand during an inflationary time. The opposite is true now, where some in Congress want to stimulate foreign investment in U.S. real estate.
One of the primary objectives of a foreign person visiting the U.S. or buying U.S. real property should be to avoid having themselves classified as a U.S. resident. Classification as a resident can have many potential detriments. For example, a Canadian might lose their Canadian health insurance benefits under OHIP or another Province protocol. Staying too long in the U.S. and establishing too close a connection (establishing Florida or U.S. domicile) can result in the foreigner becoming a U.S. resident for tax purposes, exposing them to U.S. taxation on their worldwide income, and exposing their estate to U.S. estate tax on their worldwide estate. Furthermore, once resident, becoming nonresident again can result in a substantial departure tax.
In general, with proper planning, it is not difficult to avoid residence and domicile. With or without planning though, a green card holder is treated as a permanent U.S. resident for income tax and other purposes.
Unlike other states, Florida does not expose a non-resident individual to state level income tax and has plenty of warmth and sunshine. It is therefore a U.S. state often chosen by Canadians and other internationals who desire a U.S. residence.
Buying U.S. Real Property:
When buying U.S. real property, non-U.S. residents should take steps to avoid potential U.S. income and estate taxes. Upon a sale of U.S. real property by a foreign person, a withholding tax of 10% of the gross sale proceeds generally applies and must be collected by the seller at closing. There are several exceptions to this rule. Furthermore, if a non-U.S. resident dies owning U.S. real property or other U.S. sited property (shares in a U.S. corporation, tangible personal property, debts of U.S. persons, etc.), that property is subject to U.S. estate tax. As such, steps should be taken to avoid exposure to U.S. estate tax using various common legal structures.
Florida Property Tax:
An owner of Florida real property is subject to a state property tax. That tax is generally assessed at a rate of just under 2%, and is dependent on the county in which the property is located. U.S. residents who have their primary home in Florida are entitled to special benefits that are not available to foreigners. These benefits are associated with property rising to a status where it is classified as “homestead.” Non-residents are not entitled to these benefits because their property can’t be classified as homestead. A resident alien possessing a “green card,” however, may own homestead property. Furthermore, in some circumstances, if nonresidents are married to permanent residents or U.S. citizens, or have children who are U.S. citizens or permanent residents, homestead status may be achievable with proper planning.
With routine planning and some knowledge, a Canadian or other non-U.S. resident will find no difficulty in avoiding a change of tax residence. Depending on the type of property and its value, various ownership structures can avoid the impact of U.S. income and estate tax laws. Florida welcomes nonresidents with relatively low property taxes and an absence of state income taxes.