One of the most complicated aspects of buying a home internationally is understanding the tax consequences. You do not want to end up increasing your tax bill when you buy real estate in Arizona, especially if the point of your investment is to eventually make a profit. You may be surprised to find that many of the things you have heard are exaggerations or just plain wrong, which is why you need the help of a competent real estate agent and knowledgeable tax specialist when buying a home in Arizona. For questions specifically pertaining to the tax consequences of Canadians buying in the U.S., you are advised to contact Dale A. Walters, CPA, PFS, CFP®, who is with Keats, Connelly and Associates. This subject can be quite complex and they are specialists in this area. Check out some of his tips on the basics of buying real estate in the U.S.

Questions About Estate Tax in the U.S.

A common worry among Canadian buyers in Arizona is that the U.S. will request a tax of 50% on any assets that are taxable in this country. This would include a house in Arizona. However, what few homebuyers realize is that the U.S.-Canada Tax Treaty allows them to exempt assets of up to $5 million per person. This means that if your worldwide assets are worth less than $5 million, you will not have to pay the U.S. estate tax upon the death or yourself or a co-owner of the home. If they are greater than this number, you will pay 35% in taxes. The law tends to change every few years, though, which is why you should seek the guidance of a real estate agent or a tax professional before buying a home in Arizona.

An additional fact to know about the estate tax is that it is only meant to tax the U.S. assets of nonresidents, not the worldwide assets. This means you do not have to let the IRS know about your Canadian assets, but if you do, you may benefit from using a small amount of the exclusion given to U.S. residents. As of 2011, the exclusion for U.S. residents is $5 million, so if your percentage of that exclusion ended up being 5%, for instance, the result would be an exclusion of $250,000 per person.

Pay Taxes to Both Countries

Another question among Canadian homebuyers in the U.S. is whether rental income earned in the U.S. has to be reported in both this country and Canada. The answer is that you need to report the income in both countries, as the income was earned in the U.S., and Canada requires you to report worldwide assets. However, you can use the foreign tax credit to your advantage so you do not have to pay taxes twice on your rental income. This way, your Canadian taxes owed are reduced by the amount of taxes paid in the U.S. Note that you must report the income in both countries even if your renters pay you in Canadian dollars only.

Know the Best Types of Direct Ownership When You Buy Arizona Property

You have many ownership options when buying real estate in Arizona. If you choose direct ownership, your next step is to decide the specific type. Consider some of the pros and cons of each, as well as what Walters would suggest.

Community Property: This option is one of the most common types of direct ownership, though you are advised to opt to include rights of survivorship, too.

• Pros: Simple; no cost; potential capital gain tax advantage upon death
• Cons: Must pay probate expenses; not an option in all states; no liability protection

Community Property with Rights of Survivorship: This is preferred when available.

• Pros: Simple; no cost; potential capital gain tax advantage upon death; no probate expenses
• Cons: Must pass directly to surviving spouse; not available in all states; no liability protection

Joint Tenants: This is the preferred choice where community property is not available.

• Pros: Simple; no cost
• Cons: No potential capital gain advantage upon death; no liability protection

Tenancy by the Entirety: This is usually the preferred choice in Florida.

• Pros: Simple; no cost
• Cons: No potential capital gain advantage upon death; no liability protection

Tenancy in Common: This is the preferred option for couples not married according to U.S. law, and is not advised for multiple owners.

• Pros: Simple; no cost; can be used with unmarried couples and multiple owners
• Cons: No potential capital gain advantage upon death; no liability protection

Know the Best Types of Indirect Ownership When You Buy Arizona Property

Some Canadians who buy real estate in Arizona prefer to own the property indirectly, usually for tax purposes. This is often considered a good option for multiple owners, though couples may also see some benefits.

Canadian Corporation: This is recommended only in limited situations, so proceed with caution.

• Pros: Avoids U.S. nonresident estate tax
• Cons: Higher taxes; costs; complexity

Canadian Limited Partnership: This is recommended in limited situations so it is rarely used.

• Pros: Avoids U.S. nonresident estate tax
• Cons: Costs; complexity

Canadian Trust: This is not one of the preferred indirect ownership types, as there are better solutions.

• Pros: Avoids U.S. nonresident estate tax
• Cons: Higher taxes; costs; complexity: 21 year step up

U.S. Limited Liability Company: This should never be used.

• Pros: Asset protection
• Cons: Higher taxes; costs; complexity

U.S. Corporation: This should be used rarely, and then only with a Canadian Corporation.

• Pros: Asset protection
• Cons: Higher taxes; costs; complexity

U.S. Revocable Trust: A Cross-Border TrustSM is best used with a 2nd home with a value of at least $750,000. A traditional U.S. revocable living trust is not recommended because there are cheaper ways of avoiding probate.

• Pros: Avoids probate; other potential benefits for next generation
• Cons: Cost to establish; no asset protection

U.S. Limited Liability Partnership: This is the preferred option for couples who need asset protection.

• Pros: Asset protection; no double taxation
• Cons: Costs; limited complexity

U.S. Limited Liability Limited Partnership: This is the preferred method for buyers who are not couples but want asset protection.

• Pros: Asset protection; no double taxation
• Cons: Costs; limited complexity

Clearly, the tax issues revolving around buying real estate in Arizona can be complex. However, the help of an expert can ensure that you get a great deal on your investment without being penalized through excessive taxes. If you are a Canadian investor with additional questions about buying a home in Arizona, contact Keats, Connelly and Associates. Once you know the basics of the tax consequences, talk to a real estate professional to start finding spectacular low-priced Arizona properties.