Investing in US Real Estate - US Estate and Income Tax Implications

  • View
    72

  • Download
    0

Embed Size (px)

Text of Investing in US Real Estate - US Estate and Income Tax Implications

  • Investing in U.S. Real Estate U.S. Estate and Income Tax Implications

    November 3, 2016

    Ryan Gill, CPA, CA, CPA (New Hampshire)Senior Manager, TaxKPMG LLPryangill@kpmg.ca

  • 2 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

    Agenda- Introduction- Residency- Forms of ownership for U.S. real estate- U.S. income taxes rules - Canadian income tax rules- U.S. estate tax - Planning to avoid or reduce U.S. estate tax- U.S. gift tax- Summary- Questions

  • 3 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

    Introduction- About me- Taxation of U.S. real estate is complex. Can likely devote

    multiple university level courses to the topic.- The purpose of this presentation is to:

    - Identify various forms of U.S. real estate ownership and when to use them

    - Identify key issues with respect to the taxation of U.S. real estate.

    - Outline planning opportunities to minimize Canadian and U.S. taxes with respect to owning U.S. real estate.

  • 4 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

    Residency- All comments in this presentation assume the individual taxpayer and spouse are

    residents of Canada, and are not U.S. citizens or residents. - U.S. greencard holders are considered U.S. residents. - Canadians (non U.S. citizens) who own real estate in the U.S. and spend significant

    time there may be considered resident in the U.S. under the substantial presence test: Substantial Presence Test

    - Count days of presence in the U.S.- Part of a day counts as a day- Add 100% of current year days + 1/3 of preceding year days + 1/6 of second preceding

    year days. If total is 183 or more then meet Substantial Presence Test- If current year days are less than 183 but Substantial Presence Test is met, can use

    Closer Connection Exception to be treated as a non-resident of the U.S.- If current year days are 183 or more then must rely on Canada-U.S. Treaty to be treated

    as a non-resident of the U.S. for income tax purposes

  • 5 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

    Residency Contd- Substantial presence test examples:

    - Assume 100 days in the U.S. each year: 100 + (100 x 1/3) + (100 x 1/6) = 150 test not met (nothing to file if no U.S. income)

    - Assume 140 days in the U.S. each year: 140 + (140 x 1/3) + (140 x 1/6) = 210 test is met but can use Closer Connection

    Exception- Assume 183 days in the U.S. in the current year (year one) and 100 days in the U.S. in

    years two and three: 183 + (100 x 1/3) + (100 x 1/6) = 233 test is met, have to rely on Canada-U.S. Treaty

  • 6 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

    Forms of Ownership for U.S. Real EstateThere is no one ownership structure for all scenarios. Each situation must be analyzed separately. An individuals assets and objectives need to be assessed when determining the right ownership structure.

    Important points to consider:1. Marital status of the individual. Does the individuals spouse have own

    funds?2. Age and health of individual and spouse.3. Individual and spouses net worth including type of assets held.4. The use of the real estate. 5. How long will the property be held? 6. The source of the funds to purchase the property. 7. The individuals attitude towards tax. 8. Value of U.S. property.

  • 7 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

    Forms of Ownership for U.S. Real Estate Contd

    Personal; Joint Tenants; and Tenants in Common:- Simple structures.- Minimizes Canadian and U.S. federal income tax. Preferential U.S. federal

    capital gains tax rates (20% maximum rate in the U.S.). - State income taxes may apply (depends on where the property is located). - Alternatives with the least Canadian and U.S. tax filing requirements. This

    minimizes compliance costs for clients.

  • 8 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

    Forms of Ownership for U.S. Real Estate Contd

    Personal; Joint Tenants; and Tenants in Common Contd:- Estate planning considerations:

    - Property held as joint tenancy is not subject to probate (survivor becomes owner).

    - Property held by one individual or as tenants in common is subject to probate.- Property held by one individual or as tenants in common is transferred by will,

    and potentially subject to Wills Variation Act claims. - Exposure to U.S. federal and state estate tax.- Use these alternatives if no U.S. estate tax exposure, property will be held

    for short-term, or low property value.

  • 9 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

    Forms of Ownership for U.S. Real Estate ContdCanadian Trust:- Complex structure to properly implement. - Medium complexity with respect to Canadian and U.S. tax filing requirements.- Can minimize Canadian and U.S. income tax if structure is implemented properly.- Avoids probate and Wills Variation Act claims (estate planning considerations).- If properly structured can avoid U.S. federal and state estate tax.

    Canadian Corporation:- Relatively simple structure.- Medium complexity with respect to Canadian and U.S. tax filing requirements.- Does not minimize Canadian and U.S. income tax since U.S. tax rates are higher for corporations

    than individuals. - Can avoid U.S. federal and state estate tax if corporation is recognized as the legal and beneficial

    owner of the property.- Limited liability.- Planning available to avoid probate. Subject to Wills Variation Act claims. - Canadian shareholder benefit rules apply if property for personal-use. - Consider for property that is used for rental purposes only.- Potential double tax after death.

  • 10 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

    Forms of Ownership for U.S. Real Estate ContdCanadian Partnership:- Complex structure with complex Canadian and U.S. tax filing requirements.- Potentially minimizes Canadian and U.S. income tax.- Can be structured to avoid U.S. federal and state estate tax.- Can be structured to limit liability.- Exposure to probate and Wills Variation Act claims.- Potential double tax without additional planning after death/sale.- Use for high value properties where trust structure is not available. Can use for

    personal, rental, or personal/rental properties.

    U.S. LLC:- Complex structure with complex Canadian and U.S. tax filing requirements.- High effective tax rate on net rental income and gains.- Exposure to U.S. federal and state estate tax.- Limited liability. - Exposure to probate and Wills Variation Act claims.- Canadians should never use.

  • 11 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

    Forms of Ownership for U.S. Real Estate ContdU.S. Corporation:

    - Relatively simple structure.- Medium complexity with respect to Canadian and U.S. tax filing requirements.- High effective tax rate on net rental income and gains.- Exposure to U.S. federal and state estate tax.- Limited liability. - Canadian shareholder benefit rules apply if property for personal-use.- Planning available to avoid probate. Subject to Wills Variation Act claims.- Not recommended as more disadvantages than advantages.

  • 12 2016 KPMG LLP, a Canad