Recently we’ve been discussing some of the issues that can arise with the ownership of foreign real estate. Here is another situation we encountered:

Clients owned a vacation home in Canada which they and their children had enjoyed for many years. As part of their estate planning, they decided to gift a remainder interest in the property to their children and retain a life interest in the property. This resulted in no U.S. tax consequences except the filing of a gift tax return to report the gift.

What they were not aware of is that Canada views this as a gift of the entire property, and under Canadian tax law, this creates a “deemed disposition.” The difference between the fair market value as of the date of the gift and the basis in the vacation home is taxable income in Canada. The parent’s U.S. accountant at the time was unaware of this, and no one consulted with a Canadian accountant. Years later the parents were faced with filing past-due Canadian tax returns and paying tax that they had not expected to pay. Penalties and interest were also assessed.

Because the U.S. and Canadian tax rules are different, no foreign tax credit was available on their U.S. return, as there was no income to report on their US return at the time of the gift. The moral of this story is to always consult with a knowledgeable person in the country in which the property is located. Do not assume that the rules in the foreign country are similar to U.S. rules.

Our tax professionals can help you address the US tax implications of owning foreign real estate and work with your foreign accountant and attorney to ensure you are aware of any possible tax consequences.