When it comes to real estate, it’s been said that the three most important words are: location, location, location. For southern-bound Snowbirds, owning a home in the U.S. offers the opportunity to return to a favorite place each year, a home away from home. This allows you the certainty of knowing where you will spend your vacations and how many of your friends and family can join you there. And as the seasons pass, your vacation home will likely appreciate in value—an incentive to purchase, rather than rent, your winter getaway. If you are considering buying a “nest” in the U.S., you’ll want to take into account two key factors: choosing the right ownership structure and allocating your time across the border.
The time to decide how to structure ownership is before making your purchase. Establishing a Canadian corporation as the legal owner will help avoid U.S. estate taxes; however, rental revenue and capital gains will be taxed at the U.S. corporate tax rate of up to 35%. A Canadian partnership significantly reduces the tax burden of U.S. property that earns rental income, but will be subject to estate taxes. Still other options are setting up a Canadian trust or a hybrid trust. Each type of ownership comes with a different level of tax exposure. For this reason, it’s important to (a) understand the tax implications for you and your family, considering your “world wide” assets, and (b) establish the corporation, partnership or trust before you buy a home in the U.S. With careful planning, you can relax and enjoy your vacation home with peace of mind.
Once the purchase is complete, you will likely want to spend as much time as possible enjoying your vacation getaway. While most of us think of 183 as the magic number—days spent in the U.S. per calendar year—in fact it’s wise to keep the number 3 in mind. The IRS’ “substantial presence” test considers the time you spent in the U.S. over a three-year period, according to this formula:
- 100 percent of days in the current year; plus
- 1/3 of days in the prior year; plus
- 1/6 of days in the second preceding year.
If the average number of days spent per year, over the three-year period, exceeds 183, this may trigger a U.S. tax residency, subject to U.S. taxes. If “substantial presence” is established, you may still have the option to file for a “Closer Connection” exemption with the IRS. Keeping track of your travel dates every year is the best protection.
Of course, our closest connections are with friends and family. With careful planning, a snowbird getaway will be a great place to spend time with your loved ones, year after year.
John McCord is the Director of Private Wealth Services at the Cardinal Point, a cross-border wealth management organization with offices in the United States and Canada. John specializes in providing Canada-U.S. cross-border financial, investment, tax, transition, and estate planning services.
This piece is for informational purposes only.