Canadian Investor needs general info about investing in the U.S.
Real Estate Investor · Toronto, Ontario · Member since 2014 · 17 posts · 2 votes
Hi everyone,
My partner and I are in Canada and seriously exploring rental properties in the U.S. Before we go too far down this path, we are concerned with getting some general insights on legalities and taxes if we were to invest in properties in the U.S. It seems like there are many Canadian investors in the U.S., so we are thinking that the process will not be too onerous. But we'd love some insights and tips for setting up a corporation, financing, and accounting info. Would be grateful for any help!
Thanks,
Tanna
@Gary McGowan has given me a billing the shadow of which I could not hope to cast.
Announcing you are a Canadian looking to invest in the U.S.A. will bring you no shortage of personal communications and offers to help direct your capital into turnkey investments. This is an avenue to consider, particularly if you are troubled by the idea of having to manage property from afar {we are hands-on operators, so this has been the biggest challenge for us personally}. Like anything there will be a tradeoff of cost for convenience - like when you pull into the full service lane at the petrol station. And, like anything in this industry, you need to vet the other side of the transaction thoroughly before signing any agreement or sending any funds.
Once you have identified the area(s) in the U.S.A. where you would like to invest, another strategy to consider is finding a boots on the ground partner local to that area. The right local partner will bring you knowledge and contacts you would be hard pressed to establish on your own from afar. Sure you will be giving up some of the deal and its proceeds - perhaps half - but you will have local expertise who have skin in the deal and are motivated for its success. BP is a very good vehicle to find, get to know, and vet such potential partners.
@Chad U. has laid out the broad strokes and many things you must consider when investing in real estate in the U.S.A; several are every bit applicable to buying property in Canada. Being a U.S.A. citizen transplanted to the north, you will have the advantage of already being familiar with - perhaps even understanding - the banking and lending practices south of the 48th.
The best advice I can share is to reiterate the fundamental message given by Chad and others above and recommend you sit down with an accountant and attorney who understand cross-border taxation, liability and real estate to ensure you get the ownership organisation which fits your present needs, but which can be evolved to meet your long term investment goals while protecting your assets and minimizing your taxation.
There are a multitude of ways you can own property in the U.S.A.: directly in your name; within a U.S.A. incorporated entity; via an JV/partnership; directly in the name of a Canadian corporation; or through a 'child' entity in the U.S.A. owned by a Canadian corporation. [Note: this is not an exhaustive list]. There will be pros and cons to each approach and some will make no sense in the context of your current situation and your future plans.
As a general guideline, the more organisation you have, the more overhead costs you will incur: corporate registration, business licences, corporate income tax filings, legal and accounting fees, etc. The upside is more control over when you repatriate earnings and realize income and/or capital gains in your own hands and greater protection of personal assets through mitigated personal liability.
If your plan is to own a small number of properties in the U.S.A. only, and your present personal income is in a lower to moderate income bracket, then holding property directly in your name may make the most sense. However, if your intention is to grow your U.S.A. portfolio or you are in a top personal income tax bracket, you may wish to incorporate an entity in the U.S.A. to hold your real estate. Your real-estate profits would be taxed at the applicable U.S. corporate tax rate; which is typically higher than a U.S.A. personal tax rate on U.S.A. residents, but frequently less than your personal marginal tax rate in Canada or the full Corporate income tax rate applied to passive income. Perhaps the biggest advantage is your retained earnings could remain in the U.S.A. entity (company/LLC) and would not have to be repatriated to Canada (as they would if you held the property in your personal name). This allows you to keep earnings stateside to reinvest in additional properties without dealing with shoving funds back and forth across the border.
Note: many/most folks here on BP, including accountant types will tell you holding U.S.A. real estate in a U.S.A. corporation will result in higher taxes. This is typically true for a U.S.A. resident, but is often not the case for a foreign investor.
If you hold property in the U.S.A. directly from Canada, you will have to repatriate the earnings which translates into paying the withholding tax (30% in most instances) to the IRS and then paying the delta, between the amount withheld and what you would be taxed in Canada on the full earnings, to the CRA. This holds true if you invest via a flow-though entity in the U.S.A. such as a partnership or flow-through LLC.
If you hold the property in a U.S. corporation, you can repatriate earnings when you choose {provided they are available ;-)} and can typically do so as a foreign dividend and pay a lower rate of overall taxation. If your U.S.A. entity/corporation is a (100% owned) child of a Canadian corporation, taxes on repatriated earnings to the Canadian parent would be <=10%.
Another element, I neglected to work in above is whether you, as a US citizen, plan to return to the U.S.A. at some point. This, combined with whether you intend to own, or continue to hold, Canadian real estate after such a move, will also impact how you organise your investments.
There is also the whole element of {family} trusts which may come into play - if you have children and want to plan for future transition of assets or income splitting.
After this long ramble, I've barely scratched the surface of the number of variables to be considered and possible complexity of picking the correct "now" and "later" organisation. This brings me full circle to my opening remarks. Sit down with your partner and sketch out a plan of what you want to accomplish in the "now", the "mid term" and "in your dream scenario", then earmark several hundred dollars for professional fees and find yourself an attorney and accountant with cross-border business and real-estate experience (interview these folks like you would any other professional on your team until you find people with whom you are comfortable) and come-up with a starting point and a plan for growth which will allow you to add organisation as needed w/o incurring a large taxation event.
I hope the above is useful. If you were looking for an itemized step-by-step how-to guide, you will be disappointed, but better off.
[As an aside, Gary & Chad, these sorts of questions arise frequently enough that I'm toying with the idea of creating a sticky thread or a series of blog posts covering the various aspects. To be thorough, I would invite both of your input and also be looking to recruit a {Canadian} accountant and/or attorney with the relevant taxation and cross-border experience ... there must be some hiding here on BP?]
I'm not sure about taxes, but setting up a US company (e.g. LLC) with Canadian members is no different than US members. Financing is all about local connections when working in the context of a company (e.g. LLC) so it depends more on the member's financial strength than on what state (or country) they call home. Plenty of Toronto residents own property in the Carolinas (like Myrtle Beach) so you should be able to find local contacts to discuss the 'how to' invest in the US....
Welcome! The process to buy here is definitely no onerous, but I highly highly recommend you speak with a professional who works regularly with international buyers in the US who can guide you on your entity and tax structuring. If it's done wrong, there will be mega tax implications. For example, Canadians shouldn't do LLCs, there is a different equivalency.
I used to work primarily with international buyers (lots of Canadians) and the process isn't hard for you guys to buy here at all, but getting your setup done correctly in the beginning before you buy anything is imperative! (but once it's done once, it's done so no need to worry about it every time)
@Tanna Brodbar you will want to reach out to @Roy N.
He's a Canadian doing great things in the US.
You will get lots of different advice here but I would put a lot weight to what Roy has to say.
HI @Tanna Brodbar , nice to see another fellow Canadian investor on BP.
There are many considerations you must take into account when investing cross-border, namely how do you hold title to the property, income taxes, long-distance investing issues (ie. trusting property managers, contractors), building team members, etc. The best way to start is to pick a market, start researching it and get to know it like the back of your hand.
When holding title to US property as a Canadian, there are also many other things to consider besides income taxes including but not limited to: estate taxes, probate, liability protection, incapacity issues, witholding taxes on gross rental income/witholding taxes on sale of foreign property (known as Foreign Investment in Real Property Tax Act (FIRPTA)) and the list goes on. The fact of the matter is that no one's situation is really the same, so each person's ideal setup differs. The best advice, as @Ali Boone mentions above is consulting cross border tax and legal specialists who also have a good understanding of US real estate laws and taxation.
I can give some recommendations if needed, pls PM me.
Chad
Thanks everyone, this is really helpful. We have looked pretty aggressively in Canada but the market here is too hot so are turning to our neighbours to the south... I'm actually from the U.S. so have good history, but I haven't been living there for about 12 years and am just recently in REI as a serious business, so it's all new for me.
Gary, I've reached out to @Roy - thanks for the suggestion.
Thanks again!
@Gary McGowan has given me a billing the shadow of which I could not hope to cast.
Announcing you are a Canadian looking to invest in the U.S.A. will bring you no shortage of personal communications and offers to help direct your capital into turnkey investments. This is an avenue to consider, particularly if you are troubled by the idea of having to manage property from afar {we are hands-on operators, so this has been the biggest challenge for us personally}. Like anything there will be a tradeoff of cost for convenience - like when you pull into the full service lane at the petrol station. And, like anything in this industry, you need to vet the other side of the transaction thoroughly before signing any agreement or sending any funds.
Once you have identified the area(s) in the U.S.A. where you would like to invest, another strategy to consider is finding a boots on the ground partner local to that area. The right local partner will bring you knowledge and contacts you would be hard pressed to establish on your own from afar. Sure you will be giving up some of the deal and its proceeds - perhaps half - but you will have local expertise who have skin in the deal and are motivated for its success. BP is a very good vehicle to find, get to know, and vet such potential partners.
@Chad U. has laid out the broad strokes and many things you must consider when investing in real estate in the U.S.A; several are every bit applicable to buying property in Canada. Being a U.S.A. citizen transplanted to the north, you will have the advantage of already being familiar with - perhaps even understanding - the banking and lending practices south of the 48th.
The best advice I can share is to reiterate the fundamental message given by Chad and others above and recommend you sit down with an accountant and attorney who understand cross-border taxation, liability and real estate to ensure you get the ownership organisation which fits your present needs, but which can be evolved to meet your long term investment goals while protecting your assets and minimizing your taxation.
There are a multitude of ways you can own property in the U.S.A.: directly in your name; within a U.S.A. incorporated entity; via an JV/partnership; directly in the name of a Canadian corporation; or through a 'child' entity in the U.S.A. owned by a Canadian corporation. [Note: this is not an exhaustive list]. There will be pros and cons to each approach and some will make no sense in the context of your current situation and your future plans.
As a general guideline, the more organisation you have, the more overhead costs you will incur: corporate registration, business licences, corporate income tax filings, legal and accounting fees, etc. The upside is more control over when you repatriate earnings and realize income and/or capital gains in your own hands and greater protection of personal assets through mitigated personal liability.
If your plan is to own a small number of properties in the U.S.A. only, and your present personal income is in a lower to moderate income bracket, then holding property directly in your name may make the most sense. However, if your intention is to grow your U.S.A. portfolio or you are in a top personal income tax bracket, you may wish to incorporate an entity in the U.S.A. to hold your real estate. Your real-estate profits would be taxed at the applicable U.S. corporate tax rate; which is typically higher than a U.S.A. personal tax rate on U.S.A. residents, but frequently less than your personal marginal tax rate in Canada or the full Corporate income tax rate applied to passive income. Perhaps the biggest advantage is your retained earnings could remain in the U.S.A. entity (company/LLC) and would not have to be repatriated to Canada (as they would if you held the property in your personal name). This allows you to keep earnings stateside to reinvest in additional properties without dealing with shoving funds back and forth across the border.
Note: many/most folks here on BP, including accountant types will tell you holding U.S.A. real estate in a U.S.A. corporation will result in higher taxes. This is typically true for a U.S.A. resident, but is often not the case for a foreign investor.
If you hold property in the U.S.A. directly from Canada, you will have to repatriate the earnings which translates into paying the withholding tax (30% in most instances) to the IRS and then paying the delta, between the amount withheld and what you would be taxed in Canada on the full earnings, to the CRA. This holds true if you invest via a flow-though entity in the U.S.A. such as a partnership or flow-through LLC.
If you hold the property in a U.S. corporation, you can repatriate earnings when you choose {provided they are available ;-)} and can typically do so as a foreign dividend and pay a lower rate of overall taxation. If your U.S.A. entity/corporation is a (100% owned) child of a Canadian corporation, taxes on repatriated earnings to the Canadian parent would be <=10%.
Another element, I neglected to work in above is whether you, as a US citizen, plan to return to the U.S.A. at some point. This, combined with whether you intend to own, or continue to hold, Canadian real estate after such a move, will also impact how you organise your investments.
There is also the whole element of {family} trusts which may come into play - if you have children and want to plan for future transition of assets or income splitting.
After this long ramble, I've barely scratched the surface of the number of variables to be considered and possible complexity of picking the correct "now" and "later" organisation. This brings me full circle to my opening remarks. Sit down with your partner and sketch out a plan of what you want to accomplish in the "now", the "mid term" and "in your dream scenario", then earmark several hundred dollars for professional fees and find yourself an attorney and accountant with cross-border business and real-estate experience (interview these folks like you would any other professional on your team until you find people with whom you are comfortable) and come-up with a starting point and a plan for growth which will allow you to add organisation as needed w/o incurring a large taxation event.
I hope the above is useful. If you were looking for an itemized step-by-step how-to guide, you will be disappointed, but better off.
[As an aside, Gary & Chad, these sorts of questions arise frequently enough that I'm toying with the idea of creating a sticky thread or a series of blog posts covering the various aspects. To be thorough, I would invite both of your input and also be looking to recruit a {Canadian} accountant and/or attorney with the relevant taxation and cross-border experience ... there must be some hiding here on BP?]
Wow - amazingly helpful, Roy! The compliment is well earned :). This is a lot to take in and we clearly need experts... So our next step needs to be to find some good people for our US team to help us work through the details. This is so helpful, Roy, thank you.
Wow. Nice response @Roy N. !
Sorry for the delayed response - busy day dealing with a closing that fell apart due to Buyers not getting financing, a contractor who billed for more than double his quote and an inept property manager who still has yet to deposit ANY of October's rent. You know, a typical day in the life of a RE investor.
I would be totally on board with this plan, perhaps we can take it offline. I'll PM you.
@Roy N. You should consider writing an e-book and putting it on the Marketplace for sale. It could benefit many people.