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jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3095
Experience:  I've prepared all types of taxes since 1987.
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My parents are Canadian citizens and non resident aliens in

Customer Question

My parents are Canadian citizens and non resident aliens in the U.S. In March this year, they signed a purchase agreement with a builder in San Jose for a new house. The estimated closing date is in September. It's a $800,000 cash purchase funded by my parents.

They are now considering three options to vest the title of the house in the signing appointment with the escrow company:

Option 1: put only their names on the title.

Option 2: Put three names on the title, mine and theirs. I am also a Canadian citizen but I will get married next year with my fiancé here. This house will be our principle residence.

Option 3: Put four names on the title, mine, my parents' and my fiance's. he is a U.S. citizen.

What are the tax consequences of these three options, respectively, especially those related to the gift tax, estate tax and possible capital gains in the future when the house is sold?

Thank you.
Submitted: 1 year ago.
Category: Tax
Customer: replied 1 year ago.
Relist: I still need help.
Expert:  jgordosea replied 1 year ago.

Greetings,

 

Not only does the form or putting names on the title matter; but more so the facts, the substance or actual occurrences, determine the ownership and the tax consequences.

 

For example, not putting the parents name on the title does not change that a gift was made of the funds to buy the property.

Canada does not have gift tax and US gift tax does not apply to gifts from nonresident aliens.

There is no gift tax in any event from this transaction.

 

If the parents are simply giving the entire purchase price then only putting you or him (or you and your fiancéé) name on the title is making the form fit the actual facts.

Depending on who the gift is being made to would make the choice for only putting you or him or you and him on the title. Who the gift is made to could have future estate tax consequence.

 

If the parents intend to keep some ownership (such as to later be paid back when sold) then those facts might be that one half of the price is being gifted and the other half will be owned by them (so any gain would be theirs when sold). If they keep ownership then that property would be in their estates.

Under those facts three or four names - depending on if the gift is being made to you or both you and him would be used.

 

As to whether it is best to have this titled only in your name, only his name, or in the name of you and your future spouse (congratulations, btw) might depend on estate tax exposure. If it is intended to keep this item out of your or his estate then not having the gift to that party and not having that name on the title may be most proper.

 

Income tax consequence on sale will be the same whether owned by one or both spouses. There are exclusions from gain for primary residence used two of the five years prior to sale but either spouse can be used to qualify. If the parents keep ownership there will not be exclusion on gain from their share of the home sale.

 

As stated, the facts behind the transaction determine the tax consequence and the form, or titling, should follow those facts.

 

Please ask if you need more discussion or clarification.

Thank you.

Customer: replied 1 year ago.
Thank you very much for your detailed reply. In terms of how to vest the title, my escrow officer actually said, since only my father signed the purchase agreement, they could only put his name on the title without my mother's name. And they also asked my mom to sign an interspousal deed at closing so my dad can legally be the sole owner of the house when closing. My parents are ok with only my dad's name on the title, but would this interspousal deed trigger a taxable gift of $400,000 on my mom's part?

I understand that aliens are liable to gift tax if it's a tangible gift like a house. And the interspousal gift exemption is $128,000 annally for aliens, and aliens don't have the 5 million lifetime estate exemption to shield them.

Please advise. Thank you.
Expert:  jgordosea replied 1 year ago.

Hello again,

 

Different rules apply for nonresident aliens that are domiciled in the US or not. Non-U.S. citizens who are non-U.S. domiciliaries are generally allowed a reduced estate tax exemption amount, which permits only $60,000 of U.S. situs assets to be transferred free of U.S.estate tax.

Having your father make the purchase has created an estate that may later be subject to US estate tax.

 

Of course, this message is general information and it is understood that you need to engage a practitioner for an opinion and to verify the correct application to your circumstances.

 

It is possible to avoid any gift tax and some or all of the estate tax by only giving gifts up to the exclusion amount (currently $14,000) each year.

 

That may be best done with three names on the title (at some point if not in closing) and with annual letters to each of you and your fiancéé gifting that annual amount of value each year. Likely this could include a letter for the first year of ownership.

 

By limiting the amount given to the annual gift exclusion there is no gift tax return required, no gift tax and that amount is moved out of the father's estate. The amount is indexed for inflation but it will take more than twenty years to transfer all the value from one donor to two recipients if all gifts are below the exclusion amount.

 

Alternatively, not sure if it was already considered to gift the cash to you and have you make the purchase as cash from a nonresident is not subject to gift tax unlike real property in the US (but it may be too late to do so, depending on the purchase agreement).

 

Please continue to ask if you need more discussion or clarification.

Thank you.

 

 

 

 

 

Expert:  jgordosea replied 1 year ago.

Hello again,

 

One important qualifier that has not yet been mentioned is that under the Canada-U.S. Tax Treaty, Canadian residents have a U.S. estate tax liability only if their worldwide assets are valued at more than $5.25 million.

See http://www.pwc.com/ca/en/estate-tax-update/2009-04-13-us-tax-exposure-canadians.jhtml

 

That is, no estate tax will be due even if more than $60,000 of real property is owned in the US unless the total worldwide assets value more than $5.25 million (and that amount also now has inflation indexing possible).

 

So, the possible estate tax for US property may or may not be a consideration depending on the total worldwide assets of your father.

 

Thank you.

Customer: replied 1 year ago.
Thank you so much for your detailed reply and the link of the tax treaty between Canada and the U.S. The information is very useful.

If it's only my parents' nanes on the title but they only live there one or two months per year while me and my fiancé-soon-to-be-husband live there year round, would IRS considered it a gift from my parents to me and my fiancé in fact (though not in form, but fact is over form as you've emphasized in your previous post)? As non resident aliens, would they be hit by a large gift tax bill later (something like 40% of the $800,000 minus the annual gift exemption)? Suppose me and my fiancé will take care of things like property tax and the maintenance of the house.

Thank you.
Expert:  jgordosea replied 1 year ago.
Hello again,

You are quite welcome.

Allowing family to use the property would generally not be a gift of the property itself so long as the parents retain the rights and risks of ownership.

You and your fiance paying some of the expenses would be taking over some of the risk or responsibility of ownership but, of itself, not solely shift ownership as they would still be the insured on any policy and continue to use the property.

Your parent may even want to document the conditions under which you are using the property or they may want to have you pay them some rent and not directly pay for the maintenance. A rental agreement, even for less than the full fair rental value, would be indicative of their intent to retain ownership of the property.

Hope this clarifies for you.
Best regards.

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jgordosea
jgordosea
Enrolled Agent
2840 Satisfied Customers
I've prepared all types of taxes since 1987.