Tax implications for US non-resident purchasing REI in the US

[John Humphries]

I'm looking for someone knowledgeable to bounce some tax questions off of regarding purchasing real estate in the US as a non-resident.  Currently, I'm a US citizen, Canadian permanent resident.  I live and work in Canada but still have some money in US accounts back home in NC.  I've been considering some turnkey investments in various states and am curious if this is going to create tax headaches down the road if I follow through.  Currently, I have no US income and my Canadian income has always been below the threshold that would require me to pay US taxes.  I do my US federal return each year along with my Canadian, but have not done a State return since I stopped having US income.  If I were to purchase an investment property, I'm assuming that I would start paying State income taxes in whichever state that I buy as well as having to claim that income on my US return (and my Canadian return).  With only one or two investment properties, and assuming no change in my Canadian income situation, I would think that I would still get the foreign income exclusion in the US but am curious if the State income taxes would take a big bite out of any potential profits.  I know this is a bit of tough question with lots of moving parts, so if anyone has any experience with this type of situation, I'm open to referrals or advice!  Thanks in advance.

[Roy N.]

@John Humphries if you hold your U.S.A. properties in an incorporated entity - which would pay U.S.A. taxes - and leave your retained earnings in the company (i.e. never bring them into Canada), you should not have any amount to include in your Canadian income tax. {This works for Canadian citizens investing in the U.S.A.}

However, where you are a U.S.A. citizen, there may be an even easier approach for you.  Let's reach out to a couple of our resident accountants,@Brandon Hall and @Steven Hamilton II, for a better informed input.

[Steven Hamilton II]

@Roy N. thanks for the tag.
I've written about this a few times here. You should consider holding them personally and insure well or use an LLC and insure well. My advise is not different than the typical US citizen. Yes, you will pay taxes to the applicable state.

[John Humphries]

@Steven Hamilton II thanks for the response. I doubt I'll bother with an LLC at this point. My plan was to have it in my name. One possible wrinkle would be in getting the mortgage. I had some trouble with getting a mortgage in my name or with getting a competitive rate when I looked into this a few years ago. If I have a family member, who is a US citizen/resident making US dollars, get the mortgage in their name, how would that affect taxation? I would like to be a co-signer on the loan, in which case would I be able to put all of the profit on my return as well as write off all expenses? Alternatively, if I am not able to get my name on the loan and it is solely in someone else's name, would they have to claim on their taxes even though they are basically just a figurehead? Thanks again!

[Steven Hamilton II]

@John Humphries,

Give me a call and I'll give you a runover of your situation. The US taxes you on your worldwide income. So I hope you've been filing your tax returns and the FBAR if you've had accounts overseas with over a 10k balance (at ANY time of the year). Yes, what you are talking about is a joint venture and it sounds like its a rental. You would each report your share of the income and expenses accordingly on your own tax return unless you opted to file a partnership return which is less likely to be audited. 

[John Humphries]

@Steven Hamilton II, sorry for the late response.  Just picked up a big contract and work and have not had much time to come up for air.  I've definitely been filing all returns in the US and the FBAR each year since I moved to Canada.  It's all been relatively simple so far, but if I end up buying real estate in the US this year or next, I'll definitely be looking for some help there.  I've got a few more questions about how a deal like this would work tax-wise for myself and a potential partner, so I'll definitely be in touch before making any decisions.  Thanks again.

[Steven Hamilton II]

You would file a partnership return with a partner that would carryover to your return via Form K-1.  This would be reported on your tax return just like any dividend or interest statement.