Canadian buyers and sellers of Arizona real estate reap the same benefits as U.S. Citizens. Approximately 20% of the $50Billion Canadian home buyers in the U.S. have found their way to Arizona. Many people confuse the FIRPTA withholdings Act with a special foreign tax, which is incorrect. The Foreign Investment in Real Property Tax Act is just assurance that capital gains taxes are paid in the same manner as U.S. Citizens.
Buying a home in Arizona is similar to Canada, but generally speaking, it is much less expensive to buy in Arizona. You won’t need the services of an attorney as all the paperwork is handled by a licensed escrow officer. The Seller typically pays all the Realtor fees. And paperwork can be emailed or sent by UPS or FedEx. A mortgage typically takes 4-6 weeks, and cash is 2-4 weeks.
ATTORNEY VS. AGENT. Arizona does not require an attorney to purchase real property. In 95%+ of all transactions, the Seller pays for a Realtor to represent him, and a Buyer’s Agent to represent you. Maricopa County has enjoyed one of the best real estate markets in the last 3 decades, and as a result, there are over 80,000 agents, and of February 2020 33.6% are inactive. It is estimated that another 35% are assistants or do less than 1 transactions each year. Make sure you are selective and review qualifications, experience, and area of expertise. There is a significant difference in negotiating your new home, and your risk of liability whether it is a $300,000 or a $1,000,000 home. Don’t hire the first agent to answer the phone, there is a good likelihood you will be underwater by the end of the inspection period, without even being aware you are sinking. Ask for references, and make sure those offered closely resemble your needs.
- There are U.S .subsidiaries of Canadian Banks, check with yours
- Certain mortgages allow you to access up to 80% of the Equity of your Canadian Home
- Ask your lender if they charge a Foreign National Premium (not all do)
- Some states charge extra non-resident taxes
- Down payment required is typically 20% for primary or secondary home, and 40-50% for investment property
- Many loans do not have a prepayment penalty (as is typical in Canada).. this allows for the ability to pay off if the dollar value improves
- Homeowner Insurance is required in the U.S. (with the highest rates in Gulf Coast states, California, Florida, Texas, and other areas prone to storms, wildfires, earthquakes, etc.) Note: Arizona is one of the lowest
- Flood insurance required if home is in a recognized flood zone
- Capital Gains Tax: You may be subject to a capital gains tax in Canada and in the U.S. upon sale
- The U.S. imposes a withholding upon sale, known as FIRPTA (see more below)
- Estate Taxes: If you pass away and your worldwide estate exceeds a certain dollar amount, your estate may have to file a U.S. estate tax return
- Estate Planning: Canadian Power of Attorney should be augmented with Arizona POA, Living Trust and Beneficiary Deeds differ significantly in Canada and the US
- Taking Title & Estate/Taxes when one owner is Foreign: Certain tax provisions, such as Stepped-up tax basis for surviving spouse, are not available in some circumstances and the results can be devastating. Do not procrastinate: If you or your spouse is not a U.S. Citizen, you will want to talk to your tax advisor about how to hold title.
- US rules and regulations for taxes are different than in Canada. It is important that you speak with professional cross-border advisors for specific advice related to taxes and estate planning
- Generally speaking: If you are in the U.S. 120 days or less, there is little to no paperwork required; if 121-182 days you need to file Form 8840; if you plan on being in the U.S. 182 days in one year, you will need to file a U.S. tax return. Please seek guidence from your tax professional.
- Corporations vs LLCs: Speak to a professional advisor. LLCs are not recognized in Canada as they are in the U.S. and you may need a Corporation to be recognized as an entity
RENTING YOUR ARIZONA HOME
- If you plan to rent, rental income tax may be required, there are some exemptions here in Arizona. It may also be required to report on your Canadian tax return
- Your rental property will require a local person to act as your “Statutory Agent” in the event of a problem.
- Property Management firm fees vary, but typically you can expect to pay 8%-12% of the gross monthly rent collected. Vacation Rental Companies vary as well.
- The rental tax is paid by the tenant with his/her rent payment. This can be 1.5%-2.5%. A good property management company can collect the tax, prepare the reporting and submit it to the municipality all included in their fee.
What is FIRPTA?
The Internal Revenue Service (IRS) has imposed a withholding tax since 1980 to ensure foreign taxpayers pay the required tax on gains of U.S. Real Property. The BUYER is responsible that the withholdings are reported and paid to the IRS by the 20th day after the transfer. The Foreign Investment in Real Property Tax Act (FIRPTA) typically requires 15% withholdings. I
Ideally, the amount withheld should not exceed the seller’s maximum tax liability. To avoid unnecessary withholding, or hasten the refund of excess withholdings, the IRS can determine seller’s maximum tax liability in advance. This Withholding certificate can be completed by the Seller’s CPA when the purchase price is known.
The buyer and seller should familiarize themselves with form 8288. The seller may use form 8288-B to obtain a determination of the amount, or exemption. The buyer must file forms 8288, 8288A and any 8288B by the 20th day after the transfer. See the IRS website for further information. There are no provisions in the IRS rules for the buyer to assign their responsibility to anyone else, including the escrow or real estate agents. The escrow agent cannot provide legal or tax advice, and you should never rely on tax advice from a real estate professional including myself. You must always seek counsel from your professional advisors.
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