Canadian investment in U.S. real property
There are many reasons why Canadians purchase U.S. real property.
Purchasing U.S. property requires an understanding and analysis of the relevant U.S. and Canadian tax laws and requirements and how they apply to you.
Important tax law differences
Differences between Canadian and U.S. tax law include:
- No preferential U.S. capital gains tax rates for corporations. Using a corporation to own U.S. 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 U.S. through Limited Liability Companies (“LLC”), or use of U.S. “like-kind” (also known as “1031” or “Starker”) exchanges.
- Canada’s Foreign Accrual Property (“FAPI”) rules can trigger Canadian tax even where U.S. real property income is not repatriated to Canada.
- U.S. estate tax applies to the net value of U.S. real property and other U.S. property owned by Canadians at death. Canada only taxes the unrealized appreciation at death.
These differences and others can surprise Canadian investors and highlight the need to obtain appropriate U.S. and Canadian tax advice that Andersen in Canada provides.
The tax planning process
Tax planning for investment in U.S. 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 U.S., 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 U.S. real property, net worth, expected holding period, changes in your tax residency and other factors will also be relevant.
Canadians need to consider the U.S. federal, state and local tax laws and requirements. Receipt of rental income from a U.S. real property generally requires filing of U.S. tax returns and forms, and a plan to integrate the results with your Canadian tax returns.
Tax advisors in the U.S. often provide U.S. tax planning advice similar to what they would advise a U.S. 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 U.S. real property.
Contact Andersen in Canada to identify your ownership strategy and tax implications before you buy, confirm the structure you chose or to 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.