I am seeing an increased interest from Canadians who want to purchase real estate in the United States. There are many “experts” out there providing seminars (for a fee) on how to get rich off the American Mortgage and Real Estate Crash. The problem is the advice doesn’t often fit the practical steps to actually make any money. Holding title in tricky structures will not work with an American mortgage lender. Investing your hard earned money in a jungle, requires careful planning.
Canadians must be aware of the differences in state and local laws, as well as restrictions some cities have about weekly or monthly rentals. Having a home town expert you can trust is vital. Purchasing property is all about the location. Buying rental property is also tricky when rents can be siphoned in cash. The key is to have safe stop gaps, honest /reliable management and manage costs. The ability to obtain low rate mortgages, locate expert hazard insurance and negotiate costs are advice a Realtor lender and tax advisor can help guide.
Canadian mortgages are different from those available in the US. Americans prefer a thirty year fixed rate loan where they can count upon low payments and know exactly what to budget for in the future. Canadian loans are typically five or seven years.
Since the crash, obtaining a loan in the United States is a complex number of papers. Two years Canada revenue taxes (showing that you own rental properties already) current paystubs, the past sixty days bank statements and two forms of photo identification are only the start.
There are other decisions such as how to hold, or vest the property. Setting up an entity such as LLC or Corporation is expensive, adds to ongoing costs and many lenders will not allow this. Conventional mortgages are held in Joint Tenancy so complex strategies that guru get rich quick in real estate experts advise, is not going to work with getting a low rate on a mortgage.
In addition to adjusting to the rules and crazy regulations that Dodd Frank set forth to mortgage loans in the United States, Canadians need to understand all U.S. income tax considerations of owning U.S. real estate. Canadians are subject to American rule as to how rental income and the capital gain on the sale are taxed.
The American Internal Revenue Service (IRS) imposes estate taxes on Canadians who own U.S. property at the time of their death. This tax may apply when the value of the Canadian individual’s estate exceeds five hundred thousand dollars and the U.S. property is valued at more than $60,000. These numbers are U. S. dollars, not Canadian. The estate tax currently has a top rate of 35%. Taxes in the U.S. are likely to only increase.
There are also state specific forms of taxation. For example some States do not charge State Income tax but they collect huge transfer tax fees, require attorneys to handle transactions and on and on.
Direct ownership is the simplest avenue to hold U. s. real estate, such as Joint Tenancy or Sole tenancy. However this individual ownership has its own liability risks for a Canadian individual, who is neither a U.S. citizen nor a U.S. resident, to own U.S. real estate.
Because each individual is allowed his or her threshold amount, ownership of the property can be split between spouses and others (children or family members).
In the past Canadians owned personal-use real estate in the U.S. through a single-purpose Canadian corporations. This strategy dos not avoid the U.S. estate tax since the property wouldn’t be held by the individual. In 2004, the Canada Revenue Agency (CRA) indicated that the shareholder of such a corporation would be taxable on the deemed benefit of using a property owned by a corporation,
Ownership through a Canadian trust is another method to eliminate exposure to the estate tax. The Canadian trust alternative can be beneficial for a married couple. Under this form of ownership, one spouse (the settlor) creates the trust for the benefit of the other spouse and children. The settlor funds the trust with cash to purchase the real estate and cannot be a beneficiary or trustee nor have an interest in the capital of the trust. This creates difficulty in opening matching trust bank accounts,
The disadvantages to this type of ownership start with the settlor’s inability to control the trust or to benefit from any trust distributions of money or property. Also, if the settlor is predeceased by the spouse and ownership of the property is continued by the trust, the settlor must pay rent to the trust in order to remain at arm’s length from it so that the IRS cannot deem that the settlor owns the trust property personally
United States citizens can borrow money or acquire a mortgage in a Living Trust but Canadians cannot. Only Living Trusts that are revocable and approved by the lender are suitable. Canadians setup Canadian Trusts for the purpose of avoiding the I. R. S. and providing all the ins and outs of your structure are counter to the purpose.
Mortgage lenders, banks and financial institutions will freely provide your information to the I. R. S., when asked to do so in the future. The largest lender in the United States is actually the U. S. government, (transparency is the key word).
My advice is to research the risks, ask for advice, and like the elephant above learn from your mistakes.