Wow! This is a hot topic and most Canadians buying real estate in the US are asking questions about the tax and legal implications of doing so. While I am NOT an accountant, attorney, or cross border financial planner, I do have a slight amount of knowledge in this area (slight enough to be dangerous). I recently attended a workshop by Keats, Connelly and Associates, LLC - a firm specializing in cross border planning issues. I am providing this overview of their workshop to give you a little knowledge and get you started in planning how to best purchase real estate in the US. Of course, every person or family’s situation is unique and none of this information is a substitute for obtaining a personal snapshot of you situation and the best way for you to proceed. For that, you need to speak with a specialist. And by that, I mean a cross border planner that is familiar with tax and legal implications on BOTH sides of the border. Let this serve only as an initial reference point for you to get started.
There are 2 ways in which you may purchase real estate in the US - directly or indirectly. Directly would be owning the property in your individual name(s) in joint tenancy or community property. This form of ownership is easy to arrange, does not cost anything to set up or maintain but leaves you open to US estate tax and probate, potentially. If you decide to use this form of ownership, consider using beneficiary deeds whenever possible to transfer property after death. This type of ownership is NOT ideal for properties that produce income.
For income producing properties that you purchase, your options include (1) Canadian corporation which is not generally used due to double taxation and other issues, (2) Canadian Trust which can also cause double taxation and is generally not used, (3) Cross Border Revocable Living Trust which is generally used on larger home purchases of over $750,000 and offers protection from creditors and avoids probate. These are structured by cross-border attorney, (4) US Living Trust - there is nothing similar to it in Canada and not needed as Beneficiary Deeds can accomplish the same function when available, (5) Limited Liability Company (LLC) SHOULD NOT BE USED as they are not recognized in Canada and subject to double taxation, (6) Limited Liability Partnership (LLP) allows for limiting of liability and is recognized in Canada. Use when property will be used for business purposes like rental.
Some additional important issues to be aware of on rental real estate owned by non-resident aliens (that means you, Canadians!).
there is a DEFAULT 30% withholding on GROSS rents, BUT…..
An election can be made to withhold on the NET rents due to US/Canada tax treaty
Owner will need to file Form 1040 NR by June 15th and file W-8ECI - this filing does not apply if property is owned by an LLP or other entity
REMEMBER: Rental income is not earned income, it is INVESTMENT or PASSIVE income
While technically, Canadians cannot be employed in the US without proper documentation, you can probably get away with fixing up your own property unless you are running it more like a business.
An umbrella insurance policy may not (probably) cover your Canadian assets.
With vacation or 2nd homes, here are no tax return filing requirements until you sell the home.
Foreign Investment In Real Property Tax Act of 1980 (FIRPTA) states that if a buyer purchases a home for $300,000 or less AND intends to occupy the property themselves, withholding is not required on the sales proceeds. Otherwise, FIRPTA requires 10% withholding on the GROSS PROCEEDS, unless Form 8288B is filed, then 10% withholding on the “adjusted gain”. This form must be sent in BEFORE the closing. A W-7 application for IRS Individual Taxpayer Identification Number (ITIN) should be filed with 8288B.
Some of you may be aware that the IRS allows Americans to defer taxes on real estate using something called a 1031 tax deferred exchange. Well…Canadians DO NOT have this option apparently so be careful!
When must Canadians file US non-resident tax return ( 1040NR)? After the sale of any real estate owned and held in the US and/or annually if property is a rental.
Another point of interest: The US-Canada Treaty allows for pro-rata estate tax credit. Depending on the size of your US real estate holdings, you may want to employ an attorney to assist you with avoiding probate and estate tax issues. Best to work with someone familiar with both Canadians and US legal issues.
And finally, for investment properties only, the Bureau of Economic Analysis (BEA) which is part of the US Department of Commerce, requires information for statistics relating to FDI (Foreign Direct Investment) in the way of 3 forms: BE-605 (quarterly), BE-15 (annual) and BE12 (5 yearly review). These forms need only be filled in ONCE.
Again, let me reiterate that EVERY PERSON’S financial picture and plan is different so this information is only useful as a general guideline and the requirements and laws change OFTEN. Therefore, depending on how complex your cross-border plan is and how large and many properties you are buying, it may be advisable to consult with Cross-Border Planning Specialists and cross-border attorneys. Please use this information as general reference and to guide you on the right path of where to go to obtain further, professional help. DO NOT take it as an end-all of information for Canadians. I hope you find this information helpful and you will find recommendations for cross-border planners at my website at www.CanadiansBuyArizona.com.