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 located in the United States is US-situs under IRC 2104(a). The tax rates are the same as for US citizens: graduated 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, the tentative tax on $500,000 is $155,800, less the $13,000 credit, leaving $142,800 of estate tax exposure. That is 28.6% of the property’s value.

The treaty usually reduces this. Article XXIX-B(2) of the Canada-US treaty gives the estate the greater of the $13,000 statutory credit or a prorated share of the US citizen’s credit. For 2026, the basic exclusion is $15 million, and the credit behind it shelters that full amount. The proration formula is: (US-situs gross estate / worldwide gross estate) multiplied by the full credit. If the $500,000 vacation rental is the only US asset, and worldwide assets total $3 million, the fraction is 16.7%, and the prorated credit shelters approximately $2.5 million of US-situs estate, far more than the $500,000 property. In that scenario, the estate tax is zero.

But the proration can go the other way. 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 the fair market value of the property at death, not the adjusted basis. IRC 2031(a) includes in the gross estate “the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated.” An appraisal determines the fair market value, and the depreciation claimed during the owner’s lifetime does not reduce that value.

What depreciation affects is the income tax basis of the property. Under the US estate tax rules, the property receives a step-up in basis to fair market value at death under IRC 1014(a). For a US citizen or resident, this step-up eliminates the depreciation recapture problem entirely, because the new basis reflects the current value, not the original cost minus depreciation. For a nonresident alien, the step-up applies the same way, but only if the property passes through the estate (which it does, because US real property is included in the NRA’s gross estate under IRC 2103).

The planning implication: if the property has been heavily depreciated (especially with cost segregation and bonus depreciation), the gap between the adjusted basis and the fair market value is large. Selling the property during the owner’s lifetime triggers depreciation recapture and FIRPTA. Passing it through the estate eliminates the recapture through the step-up. This creates a tension between the estate tax exposure (which the owner may want to minimize by holding the property in a corporation) and the income tax benefit of the step-up (which requires the property to be in the estate).

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. If you hold the vacation rental through a Canadian corporation (CCPC or otherwise), your estate holds shares of a Canadian company, not US real property, and no US estate tax applies to those shares.

The trade-off is branch profits tax under IRC 884 during your lifetime. 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. The combined US rate on net rental income is approximately 25%, compared to graduated rates (10% to 37%) on a 1040-NR for personal ownership. 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.

An LLC does not help. A single-member LLC is disregarded for US tax purposes, and the IRS looks through it for estate tax purposes as well. IRC 2104 places real property in the US, and the disregarded entity does not interpose a foreign corporation between the owner and the property. 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) of the treaty provides an additional credit for property passing to a surviving spouse who is a Canadian citizen. The marital credit effectively doubles the prorated credit, sheltering twice the amount that the basic prorated credit covers.

Joint tenancy with right of survivorship (JTWROS) is the standard form for married couples buying US vacation property. At the first death, the surviving joint tenant receives the property by operation of law. For US estate tax purposes, IRC 2040(a) includes the full value of jointly held property in the first decedent’s gross estate, except to the extent the surviving tenant contributed to the acquisition. If both spouses contributed equally, half the value 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. If half the property is included in the estate, half receives a step-up to fair market value at death. 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, and the death benefit is paid to the trust, not to the estate. The trustee uses the proceeds to pay the estate tax liability.

The policy amount should match the estimated estate tax exposure, which requires a calculation of the property’s expected value at death, the prorated treaty credit, and the applicable tax rate. 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.