Many Canadian Non-U.S. Resident property owners often desire to convey or gift all or part of their real property in Washington State U.S. to another family member. A common scenario involves a cottage and lot owned by several family members who are Tenants-In-Common, each owning an undivided interest. And eventually one family member does not wish to be an owner anymore. Or parents desire to transfer their real property to their kids before passing. But what the Canadian Non-U.S. Resident property owner may not realize is that in order to convey or gift over the Washington State U.S. real property he or she must comply with U.S. Tax Laws.
Below is a brief overview of U.S. tax considerations involving a sale or gift of Washington State U.S. real property by a Canadian Non-U.S. Resident property owner:
If there is a sale of part or all of the Washington real property by the Canadian Non-U.S. Resident property owner, then there is a FIRPTA (Foreign Investment in Real Property Tax Act) withholding issue. It is generally 15% of the purchase price which amount would be a credit against any future tax due. Often it is recommended to avoid the withholding requirement by an exemption or applying for a withholding certificate. However, a withholding exemption does not relieve the Canadian Non-U.S Resident property owner from U.S.tax liability.
And as with any sale of real property there is a potential for tax on any gain realized (sale price less cost basis = gain). In order to calculate any U.S. tax due, the “cost basis” of the property must be determined (e.g. property acquisition costs and other deductible expenses, such as, improvements). The cost basis is subtracted from the sales price to establish the net “gain”.
Realize that if one family member paid more than his or her fair share amongst the other family owners, the additional contributions for property taxes, maintenance, and other items will be considered credits or partial payments toward the purchase price in the event of any sale to the generous family member.
On a side note, any capital gains tax paid in the U.S. on the sale may provide a Foreign Tax Credit to reduce the Canadian Tax payable on the Sellers’ T-1 Canadian Tax Return (under the U.S.-Canada Tax Treaty).
A sale will likely trigger Washington Real Estate Excise Tax, which is calculated at 1.1% to 3% of the sale price. The excise tax must be paid before the Deed is recorded with the County Auditor.
In order to carry out the sale it is best to have a Purchase and Sale Agreement prepared to specify the rights and duties of the parties to the date of closing (or “completion”).
Alternatively, the Canadian Non-U.S. Resident property owner may gift all or part of the property. But there is a limitation. As a U.S. Non-Resident, the Canadian property owner is entitled to gift another person up to the annual exclusion amount, which in 2022 is $16,000 USD per year tax free in the U.S. Any amount over the annual exclusion is subject to US Gift Tax which is in the 30%+ range depending on value of the gift. Spouses may have the ability to gift a greater value based upon the annual martial gift exclusion.
An important part of any transfer by gift is to determine the “fair market value” of the real property first so the amount of the gift can be substantiated if necessary to the IRS. Since the Assessed Value of the real property provided by the County Assessor (which is used for determining property taxes) is usually lower than the fair market value it is often recommended to obtain an appraisal for the real property.
Tax wise the downside of a gift is that the beneficiary would lose the full step up in the cost basis determination upon a subsequent sale of the real property in the future.
On the positive side, the gift normally does not trigger any Washington State Real Estate Excise Tax. Typically, there will be only a $10 fee. And then the Deed may be recorded with the County Auditor.
When considering “sale” or “gift” alternatives it is important to consult with both a U.S. and Canadian Tax Accountant/Advisor to investigate any tax issues on both sides of the border.
Further, there may be other alternatives to consider under Washington Law including non-probate methods. I recommend you read my blog articles about the Transfer on Death Deed (“TODD”), and the Community Property Agreement, because these non-probate methods may be more advantageous.
The above is not intended to be legal advice but is general information provided as a courtesy.
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