There are several different ways to buy real estate in the U.S. Although some of the following information may seem familiar, as a buyer in a foreign market, it is essential to understand the pros and cons of each approach in order to avoid adverse tax effects in the future.
What you need to Know
The following is a summary of useful terminology and information:
Tenancy versus Joint Tenancy
If you plan to purchase rental property in the U.S. you will want to fully understand the difference between Tenancy and Joint Tenancy. In a nutshell, the primary distinction is that with Tenancy, each individual tenant is free to do as he or she sees fit where as in a Joint Tenancy situation, each tenant owns the property in its entirety which therefore means that a joint agreement must be established before any changes are made.
Another important point to have some knowledge of is liability exposure. If, for example, you have a U.S. based rental property in your name, you could be exposing yourself to increased risks should any liability issues arise.
Of course, the option to purchase additional insurance is available but this route doesn’t come without limitations as the coverage may not include full liability. Registering the property using a business entity can help alleviate that liability.
Owning U.S. based property using a business entity could help you sidestep some taxation issues on a personal level but tread with caution as the ratio is delicate and is dependent upon the specific circumstances of each situation. Carefully review your circumstances and don’t be shy to tap into the guidance of a qualified, cross-border tax professional to help ensure the ramifications are fully understood.
Liability and Insurance
Generally speaking, the U.S. is more litigious in nature than other countries. Therefore, you’ll want to have a solid understanding of liability issues and parameters. Investment properties are typically a higher liability risk than personal use real estate. Yes, having a business entity own the property can help to prevent personal liability exposure but be sure to consider the property’s cash flow, holding period and other taxation factors that could render other, less costly options to fully protect yourself, your family and your assets.
Understand Taxation Loops and Holes
Using a Canadian-based company to purchase U.S-based property can be helpful but it certainly isn’t risk-free. This approach, for example, can lead to additional tax-filing requirements which can lead to paying more money and in some cases even double taxation. Limited Liability Companies (LLCs) and corporations are especially susceptible.
An important point to note is that only U.S. property that is used in a business or trade is subject to American tax-filing requirements. If the property is solely your second or vacation home, it is exempt until the property is sold. Then, the capital gain must be reported through a non-resident tax return. Rental income produced through U.S-based property is also obliged to file a non-resident tax return, IRS form 1040-NR
Also important to note, as per the U.S/Canada Tax Treaty, Canadians are awarded a pro-rated amount of tax exemptions allotted to U.S. residents. Often times, this amount is enough to exclude the property from estate taxation.
Non-U.S. residents purchasing U.S. property often become overwhelmed and bogged down with bureaucratic implications which can lead to losing focus on the overall big picture.
Information contained in this publication has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made by MRG Wealth Management Inc., or any other person or business as to its accuracy, completeness, or correctness. Nothing in this publication constitutes legal, accounting or tax advice or individually tailored investment advice. This material is prepared for general circulation and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. This is not an offer to sell or a solicitation of an offer to buy any securities.