Canadians buying US Real Estate through US Partnership: LP, LLP & LLLP
Allan Madan, CA
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.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.
Alan, Can the Limited partner be a Canadian holding corporation and still be tax efficient?
It’s more tax efficient for an individual to hold units in the LP directly. However, you can still use a Canadian holding company as a limited partner if you must.”
Hi Alan, seems like in 2016 CRA is treating LLP, LLLP, as corporations, so best route is LP then? Please confirm. Then what is the proper entity for GP of LP? Your diagram shows it should be a US entity – then can LLC be this, or needs to be C-Corp? Can it be Canadian Corp? In my case, LP investment funds will come from (1) personal (2) Canadian Corp, so I would need to start 2 other entities (LP and one for GP). Do you do this type of work to open new entities (in Ohio).
The CRA has recently taken the position that LLLPs and LLPs are ‘foreign corporation’s and not flow-through entities. As a result, do not purchase US real estate through ha US LLP or a US LLLP, because you will be double taxed.
I suggest that you purchase US real estate through a US LP. A US LP is treated as a flow-through entity for US and Canadian tax purposes. The US LP has two types of partners – limited partners (i.e. Canadian individuals) – and a General Partner (i.e. a US C-corporation). I can setup this structure for you.
Ohio is a great state to purchase low-cost rental properties. I used to invest in Canton, Ohio before cashing-out for a profit.
Does the Canadian investor need to be accredited to create a US LP?
No, a Canadian investor does not need to be accredited to create a US LP.
Will I have to file US taxes if I am only Canadian investing through an LP structure?
Yes, you will have to file a US 1040-NR tax return with the IRS in respect of your share of the US partnership’s income or loss for the year. The partnership will issue a tax slip to you, called a K1. This slip must be attached and submitted with your US 1040-NR return. I can prepare a 1040-NR return for you for a fee of $300 CAD + disbursements and taxes. For further information, please contact me on my email: email@example.com