How Canadians Should Own U.S. Real Estate

This article is called “How Canadians Should Own US Real Estate” and going through it is bound to help if you are looking for information surrounding US real estate financing for Canadians.

This post will take you through four different methods, or structures, that you can use to purchase rental properties in the US, so, let’s get started.

How Canadians Should Own US Real Estate – Method One:

The first way that you can own US property is personally, in your name; that means you’ll be entitled to the property. In this situation, you will file a US non-resident personal income tax return and pay US income taxes on the rental profits derived from the US property. You will also report the US rental profits on your Canadian income tax return and pay Canadian income taxes.

I know what you’re thinking; that’s double taxation. Well, it really isn’t, because you will receive a foreign tax credit on your Canadian personal tax return for the US taxes already paid. The benefit of this structure is that it’s simple and the compliance costs are low. The really big disadvantage is that you do not have limited liability protection. So, should there be a lawsuit, your personal assets like your home, your car, and your investments will all be at risk?

Here’s a tip: If you decide to purchase a US rental property personally then make sure that you buy liability insurance to protect yourself.

How Canadians Should Buy US Real Estate – Method Two:

The second way that Canadians can own US real estate is through a US “C Corporation”. In this case, the C Corporation would acquire and be entitled to the property directly. The US C Corporation will file a US corporate tax return and pay US income taxes on the rental profits derived. The advantage of this method is that it offers limited liability protection. So, should there be a lawsuit, your personal assets are not at risk?

The disadvantages are twofold. First, it’s more expensive in terms of tax preparation fees to file and prepare a US corporate return in comparison to a US personal return. The second disadvantage is that when dividends are paid from the US Corporation to you, here in Canada, there will be a withholding tax of up to fifteen percent. That’s on top of the corporate income taxes already paid in the US.

How Canadians Should Own US Property – Method Three:

The third way how Canadians can own US property is through a cross border trust. Let’s look at an example of a married couple that decides to purchase investment property worth a hundred thousand dollars in Arizona. Each spouse will create a cross border trust and their trust would own fifty percent each in the US rental property.

Now, why would you want to use this structure? There are two main reasons. Number one, such a structure will avoid probate fees which occur upon your death. Probate fees can be as high as three percent of the value of the property. The second reason is that this structure, that is a cross border trust, reduces estate taxes upon your death. Estate taxes can be as high as forty percent of the value of the property when you die.

The Canada-US tax treaty has a special provision that states that if the value of your worldwide assets, upon your death, is less than 5.25 million dollars; you will not have a US estate tax liability. For most Canadians, they are well under the 5.25 million dollars mark in worldwide assets, so, this complex structure really won’t benefit them.

How Canadians Should Purchase US Property – Method Four:

The fourth way you can own US real estate is through a Limited Liability Partnership in the US. Let’s walk through how this works. In step one, you will form a US Limited Liability Partnership, or LLP, in the state in which the US rental property is located.

In step two you will create and form a US C Corporation in the same state where US rental property is located. The US C Corporation will be the general partner and will own one percent of the partnership. The US C Corporation, because it’s the general partner, bears all of the risks but only receives one percent of the profit from the partnership.

In step three we will determine who the limited partners are to be; for example, yourself, your spouse, and/or third-party investors. Collectively, the limited partners will own ninety-nine percent of the partnership units and receive ninety-nine percent of the profits. The limited partners are only at risk for their initial investments, so they do have limited liability protection.

The reason I like this structure is twofold. Fist, it offers limited liability protection to you and you can sleep at night without having to worry about your personal assets being at risk. The second reason I like this structure is that it allows for the flow-through of US taxes paid as a foreign tax credit on your personal tax return here in Canada. So, double taxation does not result. This is the structure that I recommend.

If you would like to learn more about tax structures to buy real estate in Canada, have a look at  Tax on Real Estate in Canada.

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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