Dual citizen residing in Canada doing 1031 exchange in US

[Nina W.]

Hi! My husband and I area dual Canadian/US citizens residing in Canada. We are interested in purchasing property in the US in order to later upgrade and benefit from a 1031 exchange. I read that as dual citizens we not only would not benefit from a 1031 exchange but also we would be double-taxed. Is anyone here an expert on Canadian taxes with respect to purchasing US real estate? Thank you so much!

[Oren K.]

Nina,

Not an expert but some knowledge.

Firstly, @Account Closed is not wrong but using LLC's is possible as long as you instruct your US tax preparer to treat it an a corporation. That way, the IRS & CRA will be treating the entity in the same way.

Second, Double tax is thrown around a lot but many times incorrectly. On any income from the US, you must pay your US taxes via the IRS. You then report the income in CDA and a credit for US taxes paid. Any taxes still due are then paid to CRA. At the end of the day, you are paying at the CDA tax rate only. Where double taxation does happen is if you use an LLC and personal tax rates in the US. CRA will treat the LLC as a corporation; basically a mismatch.

Thirdly, 1031's should NOT be used by a Canadian citizen paying CDN taxes. It is available and defers taxes in the US but CRA requires you to report any holdings worth over 100K(?) and when the property is sold, regardless on 1031 status, all profits are taxed that year with no credit since no US taxes were paid. Eventually when you do sell without a 1031, you will pay US taxes but will not be able to use all the tax credit with the CRA.

Finally, this is not an area to get advice  from non professionals (like me :). Before investing, find a cross border CA / CPA tax specialist and get him to review anything you want plan to do.

Oren