Canadians: Consider These 3 Things When Investing in US Real Estate

Canadians face three unique challenges when investing in US real estate: 

The first is financing. To get the best terms, many US lenders want a US resident on the title of the property to acquire. So if you’re a Canadian, financing can become a challenge.

The second is management. You can’t just drive by the property and check it out. Who is going to be looking after things if you’re in Canada? Management becomes an issue and a challenge.

The third is deal flow. If you’re not active in the market — if you’re not targeting sellers and brokers and meeting with them face-to-face — it can be challenging to get good deal flow if you’re doing things all on your own.

(This is where syndication comes in. It allows you to really put your money to work by passively investing in a large multi-family property and have the professionals manage it for you.)

But here are the three things you must consider if you’re a Canadian looking to invest in US real estate. Setting things up wrong can cost you a whole lot of money.

1. Structure

An LLC is the preferred structure for US real estate investors, since it provides a lot of benefits. It’s a great structure to use if you’re an American citizen.

But if you’re a Canadian, you have to abide by the CRA (Canada Revenue Agency), and it does not recognize an LLC. So if you have all the tax credits that are coming through the LCC — your depreciation and your bonus depreciation — when it comes time to do your Canadian taxes, the CRA won’t recognize the LLC nor the tax you paid on the US side of the border.

This means you’re going to get double-taxed. The way to avoid that is to use an LP, a limited partnership, which the CRA recognizes. This allows you to use tax credits. So you get credit for the tax you paid on the US side, and then you pay whatever is remaining on the Canadian side.

2. Personal Structure

Are you going to invest in a syndication as yourself, under your own name? Or are you going to set up a corporation or entity to invest through? These are discussions to have with your investment-specific accountant and investment-specific lawyer. It’s all going to come down to your own specific situation.

Everybody’s situation is different. So just make sure you’re working with a cross-border accountant who specializes in cross-border real estate investments. They will be able to guide you on how to structure yourself personally — whether or not it’s beneficial to invest through an entity or invest under your own name.

3. Repatriation

Repatriation refers to bringing back your profits from the US to the Canadian side of the border. If you have a US entity invested in a US syndication, the syndication will give you tax credits for depreciation and cost segregation.

They will also feed you your profits from the investment — your monthly cash flow from the investment and the proceeds of the sale when the entity divests itself of the property — into your US entity.

Keeping your money on the US side of the border is a different strategy than bringing the money back across the border to an entity on the Canadian side. At that point, you are “repatriating” the funds.

You need to speak with your accountant about your most tax-efficient options. As you know, we want to avoid double taxation. Are you going to set up a Canadian entity on the Canadian side of the border that your US entity is going to feed into? Or are you just going to have direct ownership to it? The answers to all these questions will depend on your specific situation.

My advice is to work with a solid cross-border accountant who is familiar with real estate investments. They will save you so much time, money, and aggravation by structuring you properly right from the start.

It’s very challenging if you’ve already invested in a syndication or a piece of real estate using an LLC and then you have to work backwards. You’re going to pay a whole lot more tax than you have to, and it’s going to cause you so many headaches.

So, to review, here are the three things you have to keep in mind:

1. Your structure for taxes — you want to avoid double taxation.
2. Your personal structure — will you invest through an entity or under your own name?
3. The repatriation of money. Are you keeping it on the US side of the border, or are you planning on bringing it back over?

Once again, get a tax-specific accountant who works cross-border, who understands real estate syndication, and US real estate investing as it relates to a Canadian.