Canadian Investing In Us Real Estate

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The Best Canadian Reits For 2022

Canadians Investing in US Real Estate (Important Things to Consider)

Real estate is one of the best long-term sectors you can invest in, which makes these three Canadian REITs some of the top picks to buy today.

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Its hard to argue that investing in real estate is one of the best ways to put your money to work for you. So, naturally, finding the best Canadian REITs to buy will help your portfolio to perform well in 2022 and beyond.

Real estate is an excellent industry, because its generally quite defensive. In addition, if you find high-quality REITs with strong management teams, you can expect to see some significant and consistent growth for years to come.

So, if youre looking to add some Canadian REITs to your portfolio for 2022, here are three of the best to buy today.

Review The Impact Of Us Tax Reform

Structure choiceUp to now, ownership of U.S. real estate through partnerships or Canadian corporations seemed to be the most popular choice among Canadians. In these structures, and thanks to the tax treaty, Canadians were able to recover most of the U.S. tax cost of property ownership through foreign tax credits claimed in Canada. The reduction of the U.S. federal corporate income tax rate to an average of a flat 21% from 34% means that the tax cost of owning U.S. real estate through a U.S. corporation is now less expensive.

Canadians investing in U.S. rental real estate through U.S. partnerships or personally may also benefit from the new 20% deduction on the qualified business income. There are certain restrictions on when and how the deduction is available, but the availability of this tax incentive may make personal ownership of U.S. rental real estate appealing, especially since it can also reduce structuring cost.

Financing optionsU.S. tax reform severely limits interest deductibility. Before the law change, interest paid to third parties, such as mortgage lenders, was fully deductible for tax purposes. As of the 2018 tax year, interest deductibility is limited to 30% of taxable income. These limitations will have an immediate impact on Canadian owners with highly mortgaged U.S. properties.

Tax Planning For Canadians Who Invest In The Us

By Jason Heath on June 10, 2021

There are good reasons for Canadians to invest in the U.S., including portfolio diversification. Just keep these tax-planning and compliance requirements in mind.

Its no surprise that many Canadians invest south of the borderboth in stocks and real estate. On the world stage, economically speaking, were small potatoes.

As of May 31, 2021, Canadas country weight within the MSCI All Country World Index was less than 3%. By comparison, U.S. stocks represented almost 58%.

The average Canadian home price in April 2021 was $695,657. In Canadian dollars, the average price of a U.S. home was significantly less expensive, at $535,194 .

But before you jump into U.S. investments, know there are both Canadian and U.S. tax implications for a Canadian investor to keep in mind.

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Investing In A Real Estate Investment Trust

If you’re just getting started in the Canadian housing market, investing in a real estate investment trust can be a smart option. At their core, REITs are publicly traded companies that invest in real estate assets. The vast majority of Canadian-based REITs trade on the Toronto Stock Exchange

Like U.S.-based REITs, Canadian REITs enjoy a tax-advantaged status, which makes them a good investment for investors looking for a reliable source of passive income. In 2007, the Canadian government mandated that all income trusts must convert to ordinary, tax-paying corporations by 2011. However, most REITs were able to circumvent this ruling by agreeing to maintain 95% of their income from passive revenue sources, such as rent from rental properties or capital gains.

What Taxes And Fees Do Foreign Investors Need To Consider

Canadian Invest In Us Real Estate

Next, since the main requirement to invest in Canadian real estate is that you need to file an annual tax return, it’s important to discuss the tax implications of being a foreign investor. However, keep in mind that this is just an overview, and if you have specific questions, you should talk to a Canadian tax professional for more clarification.

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Do Canadians Pay Taxes On Us Property

Canadians will be required to pay their property tax on US property like any other US citizen. In addition, Canadians will have additional tax obligations if they generate income from a rental property in the US or sell US property for a gain on the sale.

Refer to this in the blog for details on cross-border tax implications for a Canadian buying house in the USA.

Investing In Canada Real Estate Vs The Usa

In this video I want to share with you, and this is more geared towards my friends in Canada, but also for those in the United States that are at least strange as to what the differences are between investing in Canada versus investing in the United States in real estate. More specifically, Im going to touch on some of the traditionally bred line-ups, but Im going to go more on the creative as well, because that is been where weve seen most of our coin, and its been most productive in real estate, has been focusing on the most creative techniques, because traditional techniques, and theres great videos on the differences between the two.

Thats pretty simple. Youre buying a dimension, and either youre going to payment it out, or youre going to fix it up and resell it. Theres not a whole lot of ability involved. For the majority of how we vest, we like to focus on targeting motivated vendors, people who have to get rid of their dimension, and then we try to come up with a creative solution, hopefully not having to apply much coin down or use our own recognition, and then find a way to make that deal into money.

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Dividends Interest Capital Gains And Other Investment Income

U.S. dividends, interest, capital gains and other sources of investment income are taxable on a Canadian residents T1 tax return because Canadians pay tax on their worldwide income.

Interest income earned in the U.S. generally has no withholding tax for a Canadian resident.

Any U.S. tax withheld on other sources of investment income is eligible to claim as a foreign tax credit. This generally reduces the Canadian tax otherwise payable dollar for dollar, and avoids double taxation.

U.S. dividends, interest, and capital gains must be reported in Canadian dollars based on the applicable foreign exchange rate. Most people use the average rate for the year to convert their income to Canadian dollars, but it is also acceptable to use the rate on the date of the transaction.

Capital gains are a little trickier than dividends and interest because you have at least two exchange rates to determine: the exchange rate on the date of purchase, and the exchange rate on the date of sale. Because exchange rates fluctuate, it is possible that the shift in exchange rates causes a much different capital gain or loss in Canadian dollars than in US dollars.

So far, these comments apply to non-registered, taxable investment accounts. There are slightly different implications if a Canadian buys U.S. stocks or ETFs in a different account.

Estates Of Canadians Who Invest In Us Assets May Be Liable For Us Estate Taxes

Investing In Us Real Estate From Canada
  • U.S. Estate Tax and Cross Border Benefits for Canadians A good short summary of how U.S. estate tax can impact Canadians who invest in the U.S. It has several examples based on the 2012 U.S. estate tax exemption amount of $5,000,000, which applies only to people who die in 2011 and 2012. This exemption amount will decrease to $1,000,000 for people who die after December 31, 2012, unless Congress passes a law that changes the exemption amount and the President signs it.
  • U.S Estate Tax Issues for Canadians A more in depth explanation of how U.S. estate tax affects Canadians who invest in the U.S., but it was written before the U.S. changed the estate tax exemption amount in December of 2010, to $5,000,000 for people who die in 2011 and 2012.
  • U.S. Estate Tax Another short explanation, but it ends with this all to accurate statement: Tax Tip: This is complicated, so get professional advice if you plan to own more than $60,000 of US assets when you die.

One way for Canadians to avoid U.S. estate tax is for the Canadian to invest in the U.S. assets in a way that does not involve the Canadian individual owning any U.S. assets. For example, if a Canadian individual owned 100% of a Canadian corporation that owned a U.S. limited liability partnership that owned valuable U.S. real estate, U.S. estate tax would not apply to U.S. assets because the Canadian did not own the U.S. assets. His or her Canadian corporation owned the U.S. assets.

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Withholding Tax On Recurring Rental Income

As a nonresident of Canada, any rental income you earn will be subject to a 25% withholding tax. The payer of rental payments in Canada — either your tenant or a third party known as a withholding agent — must withhold these payments, and the money must be submitted to the CRA no later than the 15th day of the following month. Otherwise, you could face steep penalties.

That said, there are ways to save money on the withholding tax. According to the letter of the law, this tax must be paid on your gross rental income. However, if you submit the correct forms, you can pay on your net rental income instead, which means you can deduct expenses to reduce your overall tax bill.

Choose Your Investment Structure

One of the first things youll want to consider is what ownership structure to use. For things like associated legal risks, costs, timeline of ownership, intended use of property, and future acquisition plans, the proper ownership structure is imperative. Below is a brief overview of what your options are for investing in the U.S. as a Canadian.

  • Individual Ownership: The simplest of all the structureswhere all ownership is on you personally.
  • Canadian or U.S. Partnership: Allows for allocation of income to multiple partners and may lower overall estate tax.
  • Canadian or U.S. Corporation: Owning the property through a corporation can limit exposure to estate tax and lessen personal legal liability.
  • Specially Drafted Trust: Cross-border or residence trusts can help minimize the exposure to U.S. estate taxes.

As far as structures go, there is no ideal or one-size-fits-all solution. Its the responsibility of the investor to consider the implications of all the options. We recommend that Canadians buying residential rental properties in the U.S. use an ownership structure that best suits their particular needs. Sometimes legal and operational requirements, such as ability of obtaining U.S. financing, may outweigh the need for high tax effectiveness.

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How Is Rental Income Taxed To Canadians Investing In Us Real Property

Rental income is taxable and for a nonresident alien it is considered FDAP and the renter is supposed to withhold 30% of each payment and submitted to the IRS. Of course, one of the main benefits of owning rental income is that the taxpayer is able to take several deductions such as mortgage interest and depreciation. The nonresident Canadian can still take these deductions as long as they make an election for their rental property income to be treated as ECI and not FDAP.

What Is The Median And Average Purchase Price Of Cross Border Us Real Estate Transactions By Canadians

Canadian Real Estate Wealth

During Apr20-Mar21, the median purchase price for US real estate bought by Canadians was $400,900, and the average purchase price was $473,600.

The median purchase price was up 37%, while the average price was down by 8% compared to the same period last year.

Historical Trend in Purchase Price of US Real Estate by Canadians

Year

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Toronto Blue Jays Hat Light Logo

If you are a Canadian who intends to purchase, or who has already purchased, real estate located in the U.S., you need to be aware of the U.S. and Canadian tax issues related to owning U.S. real property. Generally, the first question that arises is: in what manner should the property be held?

Firpta & Canadians Investing In Us Real Property

FIRPTArefers to the Foreign Investment in Real Property Tax Act. The most important takeaway for Canadians owning or investing in US real property is that while some US Capital Gains will escape US tax real estate is not excluded from capital gains income. Therefore, when a Canadian sells their US real property they may be subject to FIRPTA which may result in a 15% withholding of the sale price at the time they sell the property unless they obtain or withholding exemption certificate .

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Buying And Financing Real Estate

You may acquire property directly in the name of the Limited Partnership. However, some of Scotts Canadian clients get better financing rates when they purchase property in their personal name first. It just takes aLand Trust to do it right.

The Land Trust will let you own the property anonymously. It also allows us to avoid something called the due on sale clause.

This means you can actually buy the asset in your personal name, then transfer it into the Land Trust, Scott says.

Next, youll create a warranty deed to transfer the asset into the Land Trust so it’s now held by the Limited Partnership. This is a huge cost saving measure for Canadian investors.

No matter what type of financing or what type of asset youre working with, the Limited Partnership/Land Trust structure lets you hold that asset anonymously, in a way that’s protected. You’re also going to be able to always be able to take advantage of the best possible financing and have the best possible tax advantages.

Canadians Investing In Us Real Estate / Living Part

Tax Planning & Entity Structuring – Investing in US Real Estate for Canadians

Many Canadians invest in US real estate, either as vacation homes and/or rental properties. Even snowbirds who escape Canadian winters to spend part of the year in the warm weather of the US, can face US tax implications and filing requirements.

How can we help?

Considering purchasing a US property?

Let us help you determine the best way to hold US property before you buy.

Renting your US property?

We can help prepare non-resident tax forms to avoid upfront withholding tax on gross rents, file elections and tax returns to report your US rental operations.

Selling your US property?

Our team can help you prepare the required forms and returns to report the sale of your US property, and minimize the upfront tax withheld at the time of the sale and eventual US tax liability.

Well also ensure foreign tax credits are properly claimed on Canadian returns for US taxes paid to prevent exposure to double taxation.

Spending part of the year in the US?

Well help you determine the maximum amount of time you can spend each year in the US, and file the required forms so that you arent considered a US resident required to report worldwide income to the IRS.

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Types Of Properties To Buy

While real estate investors looking at properties in the U.S. are pleased to hear that inventory is rising, they also need to consider which types of properties will bring them the most profit or cash flow. Identifying desired properties is crucial in the homebuying process for Canadian investors. The NAR survey also found the vast majority of properties bought by foreign investors were detached single-family homes, accounting for 65 percent, up from 64 percent in 2013. Single-family homes are often in demand in areas of the U.S. that are popular with young families.

Very Informative Podcast For Those Interest In Us Rei

I listen to this podcast almost everyday driving to work. Glen does a marvellous job of interviewing an assortment of guests at different stages in their careers while completing a variety of Real Estate and overall investing strategies. Furthermore, he is open and honest about his own investing path which provides the listener with great perspectives on the challenges and joys of real estate investing. I cannot say enough great things about this podcast and by extension the host. Thanks for providing this resource for the REI community Glen!

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How To Invest In Real Estate In Canada

If you manage properties yourself, real estate will require an enormous amount of time, money, and hassle. Youll be dealing with tenants, constant maintenance or construction, and record-keeping expenses. To minimize the hassle, you can hire someone to manage it all for you. Or you can eliminate the hassle entirely by investing in REITs, or real estate investment trusts.

You can purchase individual REITs or a whole basket of REITs through an ETF.

REITs are the lowest-maintenance way to dip your toe into real estate investing. REITs are simply corporations that own swaths of real estate and lease it out to various tenants. They can own apartment buildings, malls or industrial sites. REITs pay out almost all of their taxable income to shareholders, which makes their dividends attractive. The best part is they trade on the stock exchange like any normal security.

The next easiest way to gain access to real estate investing is to rent out a portion of your principal residence. Whether you rent out a room to an international student or create a basement unit, youd be smart to maximize an asset you already have.

Beyond those two options, real estate investing really depends on your skill set and how much time you have. House flipping is much harder and riskier than television shows pretend it is, and banks have become much stricter in recent years on lending for income-properties. Before you take the plunge do your research.

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