Blog: Canadian Decedents with US Real Property Need to File a US Estate Tax Return

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On July 31, 2015, legislation was introduced to penalize estates that fail to file a US Estate tax return. These provisions become effective for US estate tax returns that are filed or should be filed after July 31, 2015. If a US estate tax return is not filed, the new rules assume that the inherited property’s basis is zero, even if no US estate tax is otherwise exigible.

Under the Internal Revenue Code, a Canadian resident who owns US-situs property (including real property) at the time of their death is subject to US estate tax on the value of the property. However, US estate tax will only result in instances where the value of the Canadian resident’s US-situs property exceeds the unified credit amount available under the Canada-US tax treaty. Where it is determined that no US estate tax is payable, an estate may be inclined not to file a non-resident US estate tax return (form 706-NA, “United States Estate (and Generation-Skipping Transfer) Tax Return”). The failure to file a US Estate tax return may have negative tax consequences in the US since, pursuant to the new rules, the beneficiary’s basis on any US-situs property inherited will be deemed to be zero.

When an estate tax return is filed in respect of the deceased Canadian resident, the US property’s basis will be adjusted to the value as of the date of death. Failure to file a US estate tax return can be problematic for a beneficiary who wishes to sell inherited real estate. With no basis in the property, the beneficiary cannot deduct tax depreciation or shelter a capital gain up to the value existing at the time of the decedent’s death.

Please do not hesitate to contact the tax group if you require additional information or clarification.

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