*
|
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.
