US Estate Tax on a Canadian's Florida Vacation Rental

US real property is a US-situs asset for estate tax purposes, and the $60,000 NRA exemption covers almost nothing. A vacation rental worth $400,000 or more puts a Canadian owner well past the threshold where the treaty-prorated credit may not fully shelter the exposure. What makes vacation rentals different from a primary residence is depreciation: if you have been claiming depreciation (especially with cost segregation and bonus depreciation), the adjusted basis is lower, which means the gain at death is larger and the estate’s options for managing the exposure are shaped by the holding structure chosen years earlier.

How much estate tax exposure does a vacation rental create?

The estate tax on a nonresident alien applies to US-situs assets above the applicable credit. Real property in the United States is US-situs under IRC 2104(a), and the rates run from 18% to 40% under IRC 2001(c). Without the treaty, the credit is $13,000, covering $60,000 of taxable estate. On a $500,000 property, that leaves roughly $142,800 of exposure. The treaty usually eliminates it: Article XXIX-B(2) of the Canada-US treaty prorates the full US citizen’s credit ($15 million basic exclusion for 2026) by the ratio of US-situs assets to worldwide assets.

• If the $500,000 vacation rental is the only US asset and worldwide assets total $3 million, the fraction is 16.7%, the prorated credit shelters approximately $2.5 million, and the estate tax is zero
• If worldwide assets are $1.2 million and the vacation rental is $500,000, the fraction is 41.7%, the prorated credit shelters approximately $6.25 million, and the estate tax is still zero
• The cases where the treaty credit does not fully shelter the property involve either a very high property value relative to worldwide assets, or a Canadian resident who holds substantial other US-situs assets (US stocks, US bank deposits above $100,000)

Does depreciation affect the estate tax calculation?

Not directly. Estate tax is based on fair market value at death, not the adjusted basis. IRC 2031(a) includes in the gross estate the value of all property at death, so depreciation claimed during the owner’s lifetime does not reduce the estate tax exposure. What depreciation affects is the income tax basis. The property receives a step-up to FMV at death under IRC 1014(a), which eliminates depreciation recapture for property passing through the estate.

• For a US citizen or resident, the step-up eliminates recapture entirely because the new basis reflects current value, not original cost minus depreciation
• For a nonresident alien, the step-up applies the same way, because US real property is included in the NRA’s gross estate under IRC 2103
• The planning tension: holding the property in a corporation eliminates estate tax exposure but forfeits the step-up. Holding it personally preserves the step-up but leaves the estate tax exposure in place. Selling during the owner’s lifetime triggers depreciation recapture and FIRPTA

Which holding structure eliminates estate tax exposure?

A Canadian corporation eliminates it. Shares of a foreign corporation are not US-situs under Reg 20.2105-1(f), even if the corporation’s only asset is US real property. Your estate holds shares of a Canadian company, not US real property, and no US estate tax applies. The trade-off is branch profits tax under IRC 884 during your lifetime, with a combined US rate of approximately 25% on net rental income. An LLC does not help: the IRS looks through a disregarded entity for estate tax purposes.

• The corporation pays US corporate tax (21%) on the rental income, plus branch profits tax (5% treaty rate under Article X(6)) on the after-tax profit deemed distributed. For most single-property owners, the lifetime cost of the corporate structure exceeds the estate tax savings unless the property is worth $1 million or more.
• A single-member LLC is disregarded, and IRC 2104 places real property in the US regardless of the entity wrapper. The LLC trap creates double taxation on the Canadian side and provides no estate tax benefit on the US side.

Does joint ownership reduce the estate tax?

Joint ownership with a spouse reduces the exposure if the treaty’s marital credit applies. Article XXIX-B(3) provides an additional credit for property passing to a surviving spouse who is a Canadian citizen, effectively doubling the prorated credit. Joint tenancy with right of survivorship (JTWROS) is the standard form. For US estate tax purposes, IRC 2040(a) includes the full value in the first decedent’s gross estate except to the extent the surviving tenant contributed, so equal contributions mean half is included.

• The treaty marital credit then applies to the half passing to the surviving spouse
• The step-up applies only to the included portion: half receives a step-up to FMV at death, while the other half retains the surviving spouse’s original adjusted basis (reduced by depreciation, including any cost segregation amounts)
• This partial step-up is less favorable than the full step-up that applies when one spouse owns the property entirely

Can life insurance cover the estate tax exposure?

Yes, and for properties where the corporate structure is not worth the lifetime compliance cost, a US dollar life insurance policy owned by a Canadian trust is the standard planning tool. The trust (typically an irrevocable life insurance trust, or ILIT) owns the policy, the death benefit is paid to the trust, and the trustee uses the proceeds to pay the estate tax liability. The policy amount should match the estimated exposure after the treaty credit.

• On a $600,000 property where the treaty credit eliminates the exposure, no insurance is needed. On a $1.5 million property where the estate tax could reach $150,000 or more, a term life policy with a $200,000 death benefit (covering the tax plus administrative costs) provides certainty.
• The Canadian tax treatment of the ILIT and the US reporting obligations for the trust (Form 3520 and Form 3520-A) add compliance cost. For a single-property owner with a property worth under $1 million, the planning cost may exceed the expected tax, especially after the treaty credit is applied.

What should I do next?

Run the estate tax calculation on your current facts: the property’s estimated current value, your worldwide assets (for the proration), and whether you have a surviving spouse who is a Canadian citizen (for the marital credit). If the treaty-prorated credit fully shelters the property, the exposure is zero and no structural change is needed.

• If it does not, the three planning levers are: a Canadian corporation (eliminates estate tax, adds branch profits tax), joint ownership with marital credit (reduces the exposure, partial step-up), or life insurance in a trust (covers the tax, adds compliance cost)
• The holding structure comparison covers how each vehicle affects the ongoing operations, and the snowbird Airbnb tax guide covers the full operational compliance picture

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.