International buyers who invest in US real estate make up a considerable chunk of the total investors in the country. After all, international buyers buying “only” 107,000 residential properties in one month is considered a “decrease” from the average numbers.
From a Canadian starting point, you can invest a significant amount of your retirement assets in US real estate. Yet, you’ll want to keep a close eye on the inherent dangers that come attached to the process.
For example, purchasing a second house in the United States is a terrific way to enhance your lifestyle. But, you’ll want to make sure that it’s also a wise financial decision.
You should seek multi-family rental homes. Or, you can aim for commercial buildings. Pick ones with large parking lots and additional acreage if you want to invest in American real estate in the future.
Investments like this may provide you with immediate income and long-term growth potential. For patient investors, this is a formidable combination.
Keep on reading to learn all about your US-based investment opportunities through the lens of both Canadian and US tax implications and revenue.
Invest in US Real Estate for Canadians: Tax Considerations
There are both Canadian and US tax considerations to bear in mind before making any investments in the United States for Canadian investors.
Before you can even start looking at promising properties, you’ll want to consider the different subtypes of real estate investment in the US.
Stocks and ETFs
The usual dividend withholding tax for non-residents investing in US equities or U.S.-listed ETFs is 30 percent. If a Canadian person files a Form W-8 BEN with the brokerage to keep their assets, they are eligible for a 15% reduced withholding rate under a treaty between the two nations.
Unless they are a US citizen, a Canadian investor’s sole tax responsibility to the Internal Revenue Service (IRS) is a 15% withholding tax. It’s mandatory for US residents who live in Canada to submit both US and Canadian tax returns.
If a Canadian resident who is not a citizen of the United States sells a US stock or ETF for a profit , the gain is not taxed by the United States.
Income From Investments: Dividends, Interest, and Capital Gains
Because Canadians pay tax on all of their income, US dividends, interest, capital gains, and other investment income are included in their T1 tax return .
There is no withholding tax on interest income generated in the United States for Canadian residents.
For other forms of investment income, you may be able to claim a foreign tax credit for any US tax withheld. This often decreases the Canadian tax that you would otherwise pay dollar for dollar to prevent double taxation.
You must convert dividends, interest, and capital gains earned in the United States to Canadian dollars at the current market rate. Most individuals use the yearly average rate to convert revenue into Canadian dollars. Although, it is also permissible to use the date-specific rate.
There are at least two exchange rates to consider when calculating capital gains. There’s the exchange rate on the date of purchase and the exchange rate on the date of selling.
Keep an eye on the erratic nature of currency exchange rates. A change in the value of an investment in US dollars may have a different impact on the value of the same investment in Canadian dollars. It would help to calculate the exchange rate for each Canadian dollar purchase to calculate the modified cost base.
For someone who has a stock savings plan with a U.S.-based business, this may be extremely difficult. An investor’s workload is exacerbated if they acquire their shares over time.
As an individual taxpayer, Canadian-listed exchange-traded funds (ETFs) and mutual funds (MFs) that invest in US equities are residents of Canada.
Before the fund receives a dividend, it will have to pay a withholding tax. Depending on the fund, this withholding tax may be claimed as a foreign tax credit in Canada on a T3 slip (or occasionally a T5 slip, depending on the fund).
So yet, these observations only apply to taxable investment accounts that have not been registered. A Canadian buying US stocks or ETFs in another account has significantly different ramifications.
Registered Investment Accounts
It is common for the IRS to treat tax-exempt savings accounts (TFSAs), Registered Education Savings Plan (RESP), and registered disability savings plans (RDSPs) all the same.
Aside from the withholding tax, Canadians have no additional tax ramifications. After all, these accounts are tax-free or tax-deferred. However, having a more diverse investment portfolio does come at a tiny expense.
An RRSP or equivalent tax-deferred retirement savings plan receives unique consideration from the IRS. The tax is deducted before it reaches your RRSP if you hold a Canadian-listed ETF or a Canadian mutual fund that owns US assets. There is often no withholding tax if you own US equities or ETFs listed in the United States.
There are no tax consequences to having an account in Canada or the United States if you are a Canadian taxpayer. The account’s physical location is irrelevant.
Besides, you can choose between investing in stocks or actual real estate properties after learning about the differences here .
Actual Real Estate Properties
Whether you will use the property for personal or rental purposes, Canadians investing in US real estate are subject to distinct rules.
Rental properties must be reported annually in Canada and the United States, even if they are only used for personal purposes. Tax returns for Canada and the United States should include rental income and costs.
The IRS requires a 1040-NR tax return from a Canadian person who owns a rental property in the United States. Generally speaking, any US taxes paid may be claimed as a foreign tax credit in Canada to lower Canadian taxes that would otherwise be due.
In both Canada and the United States, property sales may result in a gain or loss in capital. The difference between the buy and selling prices in
Canadian dollars determine the profit or loss for Canada, and the current exchange rates determine it at the time of each transaction. Renovating and paying off debt might lower a profit (or increase a loss).
A Canadian should file for a withholding certificate before closing. If not, they are liable to a 15% withholding tax on the gross profits from the sale of US real estate. You may claim a foreign tax credit in Canada for US capital gains tax paid.
If a Canadian taxpayer owns more than $100,000 in foreign assets, you must submit the T1135 Foreign Income Verification Statement form together with the taxpayer’s Canadian tax return. This includes US stocks, ETFs, rental real estate, and other investments.
To put it simply, the $100,000 maximum is based on how much the investments would cost in Canadian dollars. There is no requirement to declare personal-use overseas real estate, tax-sheltered RRSPs, or tax-free TFSAs.
An investor in the United States based in Canada should be aware of these fundamental tax issues. Diversifying a portfolio with US equities, ETFs, or real estate may help reduce risk, adding complexity and tax obligations.
Considerations for Direct US Real Estate Investment From Canada
As you must realize, there is no such thing as a pure direct investment in real estate. A lot of folks don’t know how much there is to it. If you own a home and rent it out, it’s more probable that you’ll have a part-time job managing the property and dealing with renters who don’t pay their rent.
The earnings and losses on individual properties are averaged out by large property corporations, which possess many properties. However, if you own one property and are involved in a dispute with the renter or need to do significant repairs, you will lose a substantial amount of money.
Don’t only look at the average price growth in your local market over the previous 20 years when making a real estate investment. You need to know how broad the range is. What if you end up having to use the services of a lawyer to deal with an uncooperative tenant?
As a result of these factors, many individuals have made a lot of money investing in real estate and holding onto it for an extended period (10, 20, or 30 years, for example). If you believe this is like purchasing a stock like Canadian Pacific, you’re kidding yourself.
Caution: Rising Interest Rates Might Sabotage Your Efforts
Interest rates are expected to rise in the long run, pushing some purchasers out of the market and others to cut their prices.
In this scenario, you will sell fewer homes. Alternatively, house values might go up or down.
If at this point, you’re getting overwhelmed by the sheer amount of options you have, you can always take our guided quiz to create the right investment portfolio for your needs.
Going for a Second Home: Investing in a US Residence
So, you’re more interested in buying a vacation home or a second home in the US.
In this case, buying a personal-use property in the United States will need consideration of US taxes in three scenarios:
- the property is rented
- you sell the property
- you die owning the property
Owners of second homes may choose to rent out their properties for a portion of the year. Rent on US real estate is subject to a flat 30% tax on the gross rent paid to you, even if this may make excellent use of an otherwise idle asset.
To reduce this tax, you may make a special election and file a US income tax return to report net rental income or loss and pay tax on any net rental income you receive.
If you sell a piece of US real estate, you’ll owe tax on the gain. This purchaser must also withhold 15% of the gross proceeds in taxes unless efforts are made to decrease the rate of taxation to 20% of the net gain by filing an application with the IRS or using a signed affidavit from the purchaser (where option applies).
However, the tax is withheld. You must still complete a US income tax return to disclose the actual gain or loss on the transaction.
Dying With Possession of Property
Keep the estate tax in mind. The US government will impose estate taxes if you die with the property in your possession and your estate is worth more than a certain amount. As of 2021, if the entire worth of your international assets is less than $11,770,000 and you die, your estate is unlikely to be subject to US tax considerations.
To the extent that property passes to a Canadian spouse who is also a noncitizen of the United States, this level is effectively doubled. Estate tax exemption amounts have fluctuated substantially during the previous two decades. However, due to changes in the number of assets that you may pass on at death without incurring a tax burden.
Exemptions in 2000 are at one million dollars. According to the current administration’s stated preference, exemptions will be reduced rather than maintained at their present levels.
It is essential to remember that current estate tax exemptions are not the only factor to consider when preparing for the future.
Making the Right Investment Choice: One Investment at a Time
Wanting to invest in US real estate can be a rather lucrative decision if you’ve done the proper research and partnered with the right firms.
We hope that our guide has shed some light on the nuances of investing in the US real estate market and the tax considerations you need to keep in mind. But, if you’d instead take a shortcut and invest in a well-tailored portfolio, you can always check out our ready-made portfolios.