Canadian Investment in US Real Property
There are many reasons why Canadians purchase US real property.
Purchasing US property requires an understanding and analysis of the relevant US and Canadian tax laws and requirements and how they apply to you.
Important Tax Law Differences
Differences between Canadian and US tax law include:
- No preferential US capital gains tax rates for corporations. Using a corporation to own US real property is generally undesirable if capital appreciation is a factor.
- Double taxation without offsetting foreign tax credits can result from Canadians investing in the US through Limited Liability Companies (“LLC”), use of US “like-kind” (also known as “1031” or “Starker”) exchanges.
- Canada’s “FAPI” rules can trigger Canadian tax even where US real property income is not repatriated to Canada
- US estate tax applies to the net value of US real property and other US property owned by Canadians at death. Canada only taxes the unrealized appreciation at death.
These differences and others surprise Canadian investors and highlight the need to obtain appropriate US and Canadian tax advice that Andersen Tax LLP provides.
The Tax Planning Process
Tax planning for investment in US real property starts with how the property should be owned – personally, corporately or through other entities. Some of these entities may have desirable tax implications in the US, but not in Canada and vice versa. Your investment objectives will impact your tax result where your goal is to develop the property or merely to hold it for your personal use. The financing of the US real property, net worth, expected holding period, changes in your tax residency and other factors will also be relevant.
Canadians need to consider the US federal, state and local tax laws and requirements. Receipt of rental income from a US real property generally requires filing of US tax returns and forms and a plan to integrate the results with their Canadian tax returns.
Tax advisors in the US often provide US tax planning advice similar to what they would advise a US resident. This advice does not take into account the Canadian tax issues that face a Canadian investor. Such action can result in an inefficient ownership structure which can double the effective tax rate on operating and selling US real property.
Contact Andersen Tax LLP to identify your ownership strategy and tax implications before you buy, confirm the structure you chose or just evaluate the alternatives that may be available to you. We will provide information, answers and solutions specific to your own situation so that you can maximize your after tax returns and reduce your exposure to estate tax.