Canadians Buying Property in Florida – The Tax Issues

My wife asked me the other day about my thoughts on buying property in Florida. As an East coast Canadian, I must say that the fantasy of owning property where it’s sunny most of the time is quite appealing. Not only that, this seems like great timing as the Canadian Dollar is slightly greater than par, and the Florida real estate market is in the dumps.   Snapping back to reality, my thoughts immediately focus on the financial implications of owning property in Florida (or the U.S in general), specifically the tax issues.

With that, I dug into my tax books and did some searching over the net to come up with the basics of tax issues when owning property in the U.S.  I’m not a tax professional, so these are some basic guidelines to give you a starting point for further research.

Rental Income

If we were to buy a property in Florida, we would likely only be able to visit once a year for a few weeks at a time. For the rest of the time, instead of letting it sit idle, the ideal situation is that the unit could be rented on a weekly or monthly basis.  Sounds like a great idea with the potential for capital appreciation, but there are U.S tax rules to be followed.

For one, U.S based rental income would require the investor to file a U.S tax return every year which is a drawback in my eyes.  The rental income is subject to a 30% withholding tax which is not included in the U.S/Canada tax treaty like when receiving U.S dividends (how investment withholding tax works). To get around this, KPMG recommends to file the U.S return with the election to pay tax on net rental income. The Canadian, in this case, will receive a tax refund in the amount that the withholding tax exceeds the tax payable on net rental income.

Capital Gains

Next question is, what happens when I sell?  You guessed it, capital gains tax.  The sale of the property results in a 10% withholding tax which is offset by the capital gains payable when filing the mandatory U.S tax return.  According to KPMG, the maximum U.S tax rate on capital gains for assets held for more than 12 months is 15%.  There are some rules around reducing the withholding tax such as applying to the IRS, well before closing, on the basis that the expected tax liability will be less than the 10% withholding tax.

Property Tax

This is a hot topic for non-resident Florida home owners as there is a two-tiered system.  Both tiers pay the same property tax rate, but there are differences in the home valuations on which the property tax is assessed.  The largest difference is in the amount that the property taxes can increase year over year.

As the Florida market is at a low right now, one can only assume that it can only go up from here, but what if market values increase by 20% in a year?  A 20% increase would be a pretty steep property tax grab.  In this case, resident Florida home owners will face a maximum increase of 3% a year, and non-resident home owners face a  maximum home assessment increase of 10%.  In addition to this, I believe that resident homeowners pay their property tax based on the assessed value minus a fixed amount thus leading to a reduced assessed value.

Estate Taxes

This is where it can get a bit tricky as the U.S has estate taxes.  According to KPMG though, Canadians will not be subject to U.S estate taxes unless their worldwide gross estate exceeds $2M USD (2008 numbers).   Even if there is no estate tax payable, the estate must file a U.S estate tax return if the property is worth over $60k.

There are obviously many many more details to U.S taxes and property, so best to consult a qualified tax professional for the finer details.

If you have property in Florida, or doing research towards buying one, I would appreciate any additional information that you can provide in the comments.