Inheriting foreign property

Inheriting property can be a nice financial boon, but when that property is outside of Canada, it can also be a big headache. Deciding whether you should keep that new foreign property has a lot to do with where it’s located, because every country has different tax laws.

Consider the situation of Heather, a 41-year-old securities lawyer in Toronto. After her parents passed away, she was left with vacation properties at ski resorts in Utah and Switzerland and had to decide whether it made sense to sell.

Swiss chalet

The Swiss property will cause multiple tax and administrative headaches. Depending on the area the property is located in, inheritance tax is either waived, or very low for spouses or children. But if Heather decides to keep the property she’ll face several types of taxes.

Adam Salahudeen, a Toronto-based tax and estate expert, explains annual tax is approximately 1.3% of the current value of the property. “It’s as if you’re paying rent.”

Heather doesn’t have the time, expertise or language skills to handle these ongoing obligations. And it will cost about $5,000 a year to hire lawyers, accountants and property managers.

Further, there will be ongoing repair and maintenance costs that can run into the tens of thousands if major work is needed.

Since Heather only plans to use the Swiss property once a year, it’s difficult to justify the costs. Salahudeen suggests she sell and pay the associated Swiss taxes – a wealth tax and substantial capital gains tax.

Capital gains are calculated by subtracting the purchase price and any renovation costs (e.g. a roof replacement or re-modeled kitchen) from the selling price. So she needs to keep all receipts.

She’ll also have to contend with the Canadian tax rate of 50% of the gain, but thanks to a tax treaty with Switzerland, Heather will avoid double taxation.

Utah lodge

The Utah lodge has personal significance—Heather’s spend holidays there since she was 14, so the question isn’t whether to sell but whether she should rent it out while she’s not there.

Renting the property presents an array of costs. Salahudeen notes there’s a 30% withholding tax on the gross rental income. So if the fair market rent is $1,000 per month, the U.S. government gets $300.

And tenants can be nightmares. Heather would have to deal with any problems (e.g. frozen pipes, heating problems) — not easy when she’s in the middle of an important trial and lives 3,000 kilometres away. So, she’ll need to hire a property manager, and this means fees similar to the Swiss chalet.

The best option is to retain the property without renting. Annual property taxes for the $3.2-million-dollar lodge will run approximately $14,000 because of its size and premium location in ski country.

Choosing how you deal with foreign property windfalls will depend on a lot of individual factors — the most important thing is to make sure you’re accounting for them all, so you avoid selling a childhood treasure or being drowned in unexpected taxes.

Dean DiSpalatro is the senior editor of Advisor Group.