I first became enthralled by the idea when an acquaintance of mine bought a house in Washington state for just under $80,000. Yes, for about the same price as a luxury care you can own a house in Washington state with a bit of land. He was renting it out and had no trouble finding any renters.
Well, turns out there are certain states that are more amenable to owning a rental property than others. There are also regulations in terms of rental income that need to be adhered.
Now, I’m by no means an expert nor do I have first hand, so take this information with a grain of salt!
Tax Implications of U.S. Real Estate
- 30% o your gross rental income is withheld unless a W-8EC1 is filed.
- You have to report rental income on United States federal and state tax returns (and if you don’t, you’re going to get into big big trouble)
- Depreciation of your property is mandatory
- On the Canadian side, you have to fill out a T1135 form, Foreign Income Verification Statement (and if you’re late with it, it’s a $2500 fine)
- As mentioned, there are certain states that have no state tax. These states still have federal tax, but no state tax. These include Washington, Florida, Texas (and many others). For Arizona, there is about a 6% tax which i pretty low.
Tax Implications on the Sale of U.S. Property
- You have to note the year of acquisition, any improvements, and date of sale (well, of course)
- If you have a lower net worth- you might consider a personal ownership/ structure, you have to consider that you have no limited liability protection (for example, if a tenant trips and falls on one of your U.S. properties you will be sued big time and there is no protection), that the long term capital gain on the sale of the home is 20% if you have held the property for more than one year (the benefit is that this is low). Another consideration is that there is estate tax exposure if you own it personally.
- On the other hand, many people hold U.S. real estate property through a Canadian Corporation. It is expensive to start up and set up however the benefit is that there is no United States Estate tax. The other thing to consider is that the tax on capital gains is taxed at regular income.
- Finally, the third option is the Limited Partnership. In the Limited Partnership Structure, you will still have U.S. estate tax exposure. There is a one time legal cost which means more paperwork.
The Low Down
- Basically you should get advice before you set up your taxation structure (so before you make that impulsive decision to buy, make sure you do your research)
- Each tax structure has different risks. For example, there are tax structures that have no risk but are costly to file
- You can mitigate exposure to risk by increasing insurance (consider the type of property, location etc.)
If you want to see a helpful infographic and detailed post explaining the different tax structures available for Canadians owning and buying U.S. real estate, check out this post by Madanca. Allan Madan is a Chartered Accountant in Toronto. If you have further questions, consulting your local friendly (and experienced by pricey) Chartered Accountant is a good idea. Here is another article by a lawyer specializing in foreigners investing in U.S. real estate. Personally these tax structures for real estate investment in the United States was a bit overwhelming for me and turned me off of buying U.S. Real estate for now haha.
Readers, are you a Canadian who owns U.S. Real Estate? What has been your experience so far?