If you die owning U.S. property or stock, beware of U.S. estate tax
Canadians, who are considering purchasing a vacation property in the U.S., often ask what is the best way to structure ownership of it. The main reason for their concern is to avoid being caught by U.S. estate tax if they die owning the property. In Canada, we don’t have an estate tax upon death, but instead, we have a tax on the unrealized appreciation of assets other than your primary residence. Due to the Tax Cuts and Jobs Act which came into effect in 2018, a U.S. or dual citizen would have to have a worldwide estate of at least $11.2 million to be subject to estate tax upon death. Non-U.S. citizens are still subject to tax for U.S. property, but there are some exemptions, and it can sometimes be prorated. Higher-value properties may require more complex planning.
- For U.S. citizens, including dual Canadian/U.S. citizens living in Canada, the U.S. estate tax applies to the fair market value of their worldwide assets upon death. Rates start at 18 percent and reach 40 percent once assets are more than US$1 million.
- Canadians, who are not U.S. citizens, are entitled to a US$60,000 exemption under the U.S. domestic tax code, or to the prorated exemption under the Canada-U.S. tax treaty. The exemption is calculated by dividing your U.S. estate property by the value of your worldwide estate, and if your estate does not exceed US$11.2 million, then your estate will get a full exemption from U.S. estate tax.
- The effects of the act are currently active until at least 2025, and unless permanent legislation is enacted, the exemption will return to the pre-2018 regime in 2026.
“Most Canadians can buy a condo or vacation home in the U.S. for personal use, just bear in mind the potential U.S. estate tax if you die owning the property.”