Written by Catherine Dingle, MSK Attorneys – Canadians buy residential and commercial property in Vermont for a variety of reasons. Proximity to Canada is a plus, the climate is similar and the state offers breathtaking mountain vistas that make it a popular year-round destination for tourists.
If you are a Canadian looking to buy property in Vermont, or anywhere else in the United States, there are some specific steps you need to follow. The United States welcomes Canadian real estate buyers but does subject them to some special rules.
How to Buy Real Estate in the United States as a Canadian
The same rules apply for residential and commercial property, but there is one unique consideration for Canadians who purchase U.S. real estate through a corporation.
Obtain an ITIN from the IRS. You first need to get an Individual Taxpayer Identification Number (ITIN) from the Internal Revenue Service, whether you are an individual or acting on behalf of a corporation. If you are acting on behalf of a corporation , you must obtain an Employer Identification Number (EIN) as well.
- Open a U.S. bank account. You will need an ITIN (for individuals) and an EIN (for corporate entities) to do this as a Canadian citizen.
- Research the property’s title. Hire a local real estate attorney to perform due diligence on the title before you agree to a sale. You should ask your attorney to review the purchase and sale agreement/contract prior to signing. Your attorney then will search the title for the property in the town or city where it is located and send you a Title Report. This will uncover any defects in the title to the property, any contested ownership of the property, any restrictions on use, or tax liens that may impact the value of the property. We strongly recommend that Canadians purchase title insurance from a nationally recognized title insurance company, even with due diligence.
- Review local zoning laws and permitted uses. A local real estate attorney will help you untangle the rules that govern how the property may be used. Vermont zoning rules and permit regulations are strict. It is an excellent idea for anyone looking to develop property to enlist the help of a Vermont attorney familiar with zoning rules in the city or town where the property is located.
- Prepare for Land Gains Withholding Tax. If you own Vermont property and sell it within 6 years of purchase, you may be subject to a withholding of 10% of the sale price. The amount can be reduced upon demonstrating to the Vermont Department of Taxes that the tax due will be less than 10% of the sale price.
- Prepare for Capital Gains Tax. If you own a property and sell it, both the IRS and Vermont charge capital gains tax based on the profit made by the owner. In Vermont, length of ownership can have a significant impact on taxes. Capital gains and Land Gains Taxes are generally calculated on the difference between the purchase price of a property and the sale price of a property, subject to certain adjustments.
- Prepare for FIRPTA Tax. The sale of U.S. property by a Canadian citizen, who is not a permanent resident of the US (green card holder), is subject to the Foreign Investment in Real Property Transfer Tax Act (FIRPTA). This requires the buyer of a property you sell to withhold 15% of the sales price for the IRS and 2.5% of the sales price for the State of Vermont at closing to ensure the payment of capital gains taxes. If you have a good estimate of the tax that will be due, you can reduce the amount to be withheld, by requesting a certificate of reduced withholding from the IRS and the State of Vermont. This may desirable for those in need of liquidity, because the withholding amounts are kept by the Federal and State governments until an income tax return is filed after the closing. Should you close in the first half of a year, you could lose access to that 17.5% until the following calendar year, depending on when you file United States income taxes.
MSK Attorneys assists Canadian real estate buyers with all aspects of residential and commercial real estate purchases in Vermont. We can perform title searches and due diligence, advise on zoning laws and variances and establish the existence of or secure Vermont permits needed for development. Contact us online or call us at 1-802-861-7000 to speak to an attorney.