Canadians buying U.S. real estate through partnerships

So you’re a Canadian investor buying real estate in the US, and are confused about whether to buy with a partnership, US C-corporation, or limited liability corporation. While there are many ways that a US property can be purchased by a Canadian investor, the best legal & tax structure is the “US Partnership”. A diagram of this structure is presented below:

As you can see from the diagram above, the US investment property is owned by a US partnership containing a general partner and limited partner. The sole purpose of the general partner is to provide limited liability protection to the Canadian limited partner(s). This means that the limited partners are only at risk for their initial investment in the partnership, thereby protecting them from personal liability in the event of a lawsuit. For investors, liability is an important factor to consider alongside the tax implications of buying US real estate.

Not only does the limited partnership shelter investors’ personal assets from risk, it also eliminates double taxation.

When forming a partnership in the US, you need to know about the three different types of partnerships available: Limited Partnerships (LPs), Limited Liability Partnerships (LLPs), and the new Limited Liability Limited Partnerships (LLLPs) which is only available in certain states. These partnerships are discussed below.

1. The Limited Partnership:

The limited partnership is available in all of the states in the US. The LP is the most basic and commonly used partnership for investment properties.

A limited partnership should have a general partner and a limited partner. The sole role of the limited partner is to provide money to the LP so that the LP has the funds available to purchase US real estate. The role of the general partner is to manage the property, collect rents, pay for expenses related to the property, and to perform other management functions.

It’s very important to prepare a partnership agreement, which specifies the roles and responsibilities of the general partner and limited partner. In the agreement, the limited partners and the general partner must be clearly distinguished from each other. In the absence of a clear distinction between the roles of the limited partners and general partner, the limited liability protection afforded to limited partners could be jeopardized.

2. The Limited Liability Partnership

The limited liability partnership is available in most states in the US. This entity is very similar to the LP described above, but with one distinction – there is no general partner in a LLP. Instead, all partners are classified as limited partners. As a result, limited partners in a LLP can be involved in the management of the LLP and the property owned, without losing their limited liability status. As limited partners, their personal assets are not at risk in the event of a lawsuit against the LLP, and they are only liable up to their investment in the LLP.

Unfortunately, many accountants and Canadian investors overlook the fact that all partners in a LLP are treated as limited partners, and appoint a general partner, even though it’s not required.

3. The Limited Liability Limited Partnership

The limited liability limited partnership (LLLP) is a new type of entity that is only available in a select number of states at the moment. This entity has the same attributes as a limited partnership, but with one distinction – the general partner is provided with limited liability protection! With limited liability protection, even the general partner is not personally liable for the activities of the LLLP.

To determine what the best entity is for you, please consult with a professional accountant and your legal counsel.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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