by Michele Lawrie
16 min read
Investing in the United States is a great opportunity for Canadian investors looking to diversify their portfolios and earn higher returns. With a large and stable economy, strong legal system, and diverse investment options, the US market offers Canadian investors many attractive possibilities.
In this guide, we will provide detailed information on the key considerations for Canadian investing in US real estate. By the end of this guide, you will have a better understanding of how to successfully navigate the US market as a Canadian investor.
Why Should a Canadian Invest in the US?
There are several compelling reasons for investing in US real estate as a Canadian.
Investing in US real estate can provide Canadian investors with diversification benefits, as it allows them to spread their investments across different markets and asset classes. One of the most notable benefits of real estate diversification is reducing potential risks due to market volatility.
2. Build Equity
The primary advantage of real estate investment is the power of Equity. When you own a real estate property, it naturally appreciates or increases in value. As you pay the mortgage and allow the property to appreciate, you build equity. Equity is the asset part of your net worth, making it one of the most effective ways to generate equity. The value of homeowner equity has reportedly tripled between 2011 and 2022.
3. Real Estate Appreciation
The US real estate market is generally larger and more dynamic than the Canadian market and may offer higher potential returns over the long term. The market is anticipated to grow steadily due to the rising population and desire for personal household space. As of 2021, commercial real estate and investment properties were estimated to be the most important elements driving industry expansion.
4. Stable Investment
Even after the fluctuation in the real estate market, it is a relatively stable investment with a steady increase in value. Compared to other investments like the stock market, which is highly volatile, real estate investment is not prone to frequent changes or inflation. Real estate properties don’t immediately differ in price based on political sentiments or capital contributions. Therefore it is considered to be a stable and safe long-term investment.
5. Rental Income
US real estate investments can generate rental income for Canadian investors, providing a steady stream of cash flow. In January 2022, the national median rent had increased by 15.57 percent year over year. That added nearly $230 to median rent levels, rising from nearly $1,640 to $1,870. The 2.37 percent yearly rise in January 2023 added $72 to the median rent. Over two years, rents have increased by $302 monthly or 18.41 percent.
6. Tax Benefits
The US tax code of the Internal Revenue Service allows for several benefits that can be beneficial for Canadian buyers.
- Income earned by an international buyer from real estate property located in America is taxed at 30% if it is not effectively connected with a US trade or business.
- The US offers a range of tax benefits for real estate investors, including tax deductions for mortgage interest and property taxes, and the provision for election of Internal Revenue Code section 871(d) for treating all income from US real property as effectively connected income with a business or trade in the United States. Canada also offers some tax benefits, but they are generally not as favorable as those in the US.
How Much Real Estate is Purchased by Canadians Every Year?
According to the NAR’s 2021 Profile of International Transactions in US Residential Real Estate, Canadians accounted for 6% of all foreign buyers of US residential property from April 2020 to March 2021. In terms of the total dollar volume of foreign home purchases, Canadians accounted for 5% of the total, spending an estimated $8.9 billion on US residential real estate during that time period.
What is Canada-US Real Property Tax Act?
The Canada-US Tax Treaty is a bilateral agreement between Canada and the United States that is designed to prevent double taxation of income earned by residents of both countries.
- The treaty is designed to promote cross-border trade and investment by allowing taxpayers to claim credits or exemptions for taxes paid in the other country.
- Under the treaty, residents of one country who earn income from sources in another are generally taxed only in their country of residence, subject to certain exceptions.
- For example, Canadian residents who work in the United States may be subject to US tax on that income, but they can generally claim a foreign tax credit on their Canadian tax return for the US taxes paid.
Cross-Border Tax Implication for Canadian Investing in US Real Estate
As a Canadian investing in US real estate, there are several cross-border tax implications that you should be aware of. Here are some of the key considerations:
- Income tax: As a Canadian resident, you will be subject to US federal and state tax on any rental income earned from the US property. You may also be subject to Canadian income tax on this rental income. To avoid double taxation, you can claim a foreign tax credit on your Canadian tax return for any US taxes paid.
- Capital gains tax: If you sell the US property for a profit, you will be subject to US federal and state capital gains tax. As a Canadian resident, you will also be subject to Canadian capital gains tax on the same sale. However, you may be eligible for a capital gains tax exemption under the Canada-U.S. Tax Treaty, which allows Canadians to exclude up to $250,000 USD of capital gains from the sale of US real estate if the property was used as a primary residence for at least two years.
- Estate Tax: If you pass away while owning US property, your estate may be subject to US estate tax. The US estate tax threshold for non-residents is currently $60,000 USD. However, the Canada-U.S. Tax Treaty provides a credit for Canadian residents to offset the US estate tax liability.
- Foreign Investment Reporting: As a Canadian resident, you may also be required to report your US investment property on your Canadian tax return and file additional foreign investment reporting forms, such as the T1135 form.
To avoid double taxation, you can claim a foreign tax credit on your Canadian tax return for any US taxes paid on the rental income. This foreign tax credit will help reduce your Canadian tax liability by the amount of US tax paid on the rental income. As a Canadian investing in US real estate, it is important to keep detailed records of your rental income and expenses and any taxes paid to properly report your income and claim any applicable foreign tax credits.
What is Inheritance Taxation and Estate Planning Taxation?
As a Canadian, if you have assets in the United States, you may be subject to US taxation on those assets. This includes both income tax and estate tax.
If you have assets located in the US at the time of your death, those assets may be subject to US estate tax. The US estate tax is a tax on the transfer of property at death and is calculated based on the fair market value of the assets at the time of death. The current US estate tax exemption is $11.7 million per individual (as of 2021), meaning that if the total value of your US assets is less than $11.7 million, you will not owe any US estate tax. If your US assets exceed this amount, you may owe US estate tax on the excess.
Engaging in proper estate planning is important to minimize your tax liabilities and ensure that your assets are distributed according to your wishes. This may include creating a will, establishing trusts, and using other estate planning tools. You should consult with a qualified attorney specializing in US estate planning to ensure that your estate plan is effective and meets your needs.
If you earn income from US sources, you must typically file a US tax return and pay US income tax on that income. The US tax system is based on citizenship, residency, and source of income, which means that even non-US citizens or non-residents may be subject to US taxation on certain types of income, such as rental income or wages earned while working in the US.
To determine your US tax obligations, you will need to consider several factors, including your residency status, the type of income you earned, and any applicable tax treaties between Canada and the US. For example, the US-Canada Tax Treaty provides guidelines for determining residency status and outlines the rules for claiming tax credits and deductions to avoid double taxation.
US Real Estate Vs. Canada Real Estate
- Market Size: The US real estate market is significantly larger than the Canadian real estate market, which means there are more investment opportunities. The US real estate values around $222.3 Billion, while the Canadian real estate value stands close to $ 63.74 Billion.
- Investment Options: US real estate market offers a wide variety of investment options, such as single-family homes, multi-family properties, commercial buildings, and more. In Canada, investment options are typically limited to residential properties.
- Price Appreciation: Historically, the US real estate market has experienced higher price appreciation than the Canadian market. However, it is essential to note that past performance does not guarantee future results.
- Population Growth: The US has a larger population and a higher population growth rate than Canada, which can create higher demand for housing and lead to higher property values.
- Financing Options: Financing options in the US are generally more favorable than in Canada, with private lenders willing to finance the purchase of investment property and negotiating the terms and conditions of various mortgage options like DSCR and Foreign National Loans. This flexibility is not available in Canada.
- Tax Benefits: The US offers a range of tax benefits for real estate investors, including tax deductions for mortgage interest and property taxes, and the provision for election of Internal Revenue Code section 871(d) for treating all income from US real property as that of a connected income with a business or trade in the US. Canada also offers some tax benefits, but they are generally not as favorable as those in the US.
Documents Required for Canadian Investing in US Real Estate
If you are a Canadian investing in US real estate, you will generally be required to provide the following documents:
1. Passport: You will need to provide a copy of your passport to verify your identity.
2. Visa or Proof of Residency: If you are not a US citizen, you will need to provide proof of your visa status or residency in the United States.
3. Credit History: You may be required to provide a credit report from your home country or an international credit agency. If you have a credit history in the United States, you should also provide a copy of your credit report. If you lack a US credit history, you can reach out to HomeAbroad and get in touch with the best mortgage lenders to overcome the challenge.
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4. Proof of Income: You must provide proof of your income, such as pay stubs or tax returns. If you are self-employed, you may need to provide additional documentation, such as financial statements or bank statements.
5. Down Payment: You will need to provide proof of funds for the closing costs, down payments, and other expenses associated with the purchase of the property.
6. Property Information: You will need to provide information about the property you are purchasing, such as the purchase price, location, and type of property.
7. Other Documents: Depending on the lender and the type of loan, you may be required to provide additional documentation, such as a letter of reference from a bank or a real estate agent.
How to Purchase US Real Estate as a Canadian?
If you are a Canadian investing in US real estate, here are some steps you can take to make the process smoother:
1. Obtain Financing
Before you begin your search for a property, you should determine how you will finance the purchase. Options include:
- Securing a mortgage from a bank.
- Obtaining financing from a US lender.
- Using cash.
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2. Determine your Budget
Once you have determined how you will finance the purchase, you should determine your budget for the property. Consider the purchase price, closing costs, and ongoing expenses such as insurance, property taxes, and maintenance.
3. Choose a location
Determine the location where you want to purchase the property. Research the local market and consider factors such as property values, rental rates, and vacancy rates. CIPS agents are the best choice for foreign buyers to find the property of their desire. Reach out to HomeAbroad as we can connect you with the most experienced CIPS agents for free.
4. Hire a Real Estate Agent
Work with a reputable real estate agent who is experienced in working with Canadian buyers. They can help you navigate the US real estate market and guide you through the purchasing process. To connect with the right real estate agent with international expertise, you can reach out to HomeAbroad. We have a great network of CIPS (Certified International Property Specialists) agents to make your purchase smooth and swift.
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5. Make an Offer
Once you have found a property that meets your criteria, make an offer. Your real estate agent can assist you in drafting and submitting the offer.
6. Home Inspection
Before closing on the property, conduct due diligence by hiring a professional inspector and obtaining a title search to ensure there are no issues with the property.
When the offer has been accepted, your lender will begin the underwriting process to approve your loan. Once approved, you can close on the property and take ownership.
8. Close the Deal
Once due diligence is complete, close on the property. Again, your CIPS agent and a lawyer can guide you through the process.
9. Manage the Property
If you plan to rent out the property, hire a property manager to handle day-to-day operations such as tenant screening, rent collection, and maintenance.
Buying real estate in the United States as a Canadian can be a smooth and easy process. By following these steps, you can ensure a successful transaction. With proper planning and assistance from an experienced professional, you can make your dream of owning US real estate come true.
Know the Rules When Buying US Real Estate at an Auction
Buying US real estate at an auction can be an opportunity to purchase property at a lower price than through traditional means. However, as a Canadian investing in US real estate, it is important to understand the rules and risks involved before making a bid. Here are some rules to keep in mind when buying US real estate at an auction:
1. Research the Property
Before making a bid, research the property and its history. This includes researching the title and any liens or other encumbrances on the property. Inspecting the property to identify any physical defects or other issues that could affect its value is also important.
2. Understand the Auction Process
Each auction has its own set of rules and procedures. Therefore, it is important to understand the auction process and any bidding rules before making a bid.
3. Bring the Funds
Most auctions require a cash deposit or proof of financing at the bid time. It is important to bring the necessary funds or paperwork to participate in the auction.
4. Know the Bidding Process
Auctions can be fast-paced and competitive. Therefore, it is important to understand the bidding process and be prepared to bid quickly and confidently.
5. Be Aware of the Competition
Other bidders may be present at the auction, including experienced investors who may have more resources and knowledge. Therefore, be aware of the competition and be prepared to adjust your strategy accordingly.
6. Understand the Terms of the Sale
If your bid is successful, you will be required to complete the sale according to the auction terms. Therefore, it is important to understand these terms, including any fees or other costs associated with the sale.
7. Consult with Professionals
It is important to consult with professionals such as a real estate attorney or tax professional who can advise you on the laws and regulations specific to the state and local jurisdiction where the property is located.
How to Finance the Purchase As a Canadian Investing in US Real Estate?
As a Canadian investing in US real estate, there are several options available to you for financing a real estate purchase in the United States:
- Private Lender Loan: Another option is to work with private lenders specializing in financing foreign buyers. They may offer more flexible terms, but the interest rates and fees may be higher. Also, this is a great option if you wish to skirt the cumbersome process of lengthy paperwork and tiring wait for the approval. HomeAbroad can connect you with the best mortgage lenders for free! For example, Foreign National Mortgage
- DSCR Loan: A DSCR (Debt Service Coverage Ratio) loan is granted based on the borrower’s ability to repay the loan. The DSCR loan is commonly used in commercial real estate, where the property generates income that can be used to repay the loan. Lenders typically require a DSCR of 1 or higher for a commercial real estate loan. This ensures that the property generates enough income to cover the debt service payments and provides a cushion for unexpected expenses or vacancies.
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- Seller Financing: You can negotiate with the seller to provide financing for the purchase. This option requires mutual agreement and typically involves a higher interest rate and a shorter repayment period.
As a Canadian investing in US real estate, it is important to research and consult a professional to determine which financing option is best for your situation.
As a Canadian investing in US real estate, intricate research and the right resources are the essentials to make your investment easy. HomeAbroad can put you through the best CIPS agents and mortgage lenders in town, saving you time, effort, and energy and allowing you to choose amongst the best. So without further delay, reach out to HomeAbroad and take the first step toward your American Dream!
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Frequently Asked Questions
1. Can I invest in US real estate as a Canadian?
Yes, you can invest in US real estate as a Canadian. However, you will need to provide documents such as proof of identity, proof of income, and evidence of funds for the down payment. You will also need to hire an experienced CIPS agent and a mortgage lender who can help guide you through the purchase process.
2. Do Canadians have to pay tax on US property?
Yes, Canadians who purchase US property are subject to taxes. They will be responsible for paying income tax on the rental income and capital gains when the property is sold.
3. Can a Canadian investing in US real estate own a Rental Property in the US?
Yes, a Canadian can own a rental property in the US. However, you must comply with all applicable laws and regulations when purchasing and managing rental property. You may also be required to pay taxes on any rental income earned from the property. Therefore, it is important to research the local market and consult with an experienced real estate agent and tax advisor.
4. Are there any special considerations for Canadian US real estate investing?
There are some special considerations for Canadian investing in US real estate. It is important to understand the local laws and regulations, as well as to be aware of potential tax implications when purchasing a property in the US.
5. Is It Worth Buying Real Estate in the USA at a Tax Sale?
Buying real estate at a tax sale in the USA is a good investment opportunity, but it is important to understand the taxation and financing options before making a purchase.
1. When a property owner fails to pay property taxes, the local government may sell the property at a tax sale to recover the unpaid taxes.
2. These tax sales can offer investors the opportunity to purchase properties at a discounted price, sometimes for as little as the unpaid taxes owed.
6. Are houses in the USA more than in Canada?
As a Canadian investing in US real estate, it is important to understand that house value greatly depends on the location, size, and other factors related to the house. In general, housing prices can be more affordable in some parts of the USA than in some parts of Canada, and vice versa.
According to a recent report by the National Association of Realtors, the median home price in the United States was $353,900 in the fourth quarter of 2021. In comparison, the Canadian Real Estate Association reported that the national average price for homes sold in January 2022 was CAD $698,772 (approximately USD $554,290).
7. How much US real estate is purchased by Canadians every year?
According to the National Association of Realtors, Canadians topped the list among international buyers of US real estate property. Canadians purchased 8,800 home units valued at $4.2 billion from April 2020 through March 2021.
8. Can a Canadian investing in US real estate own a rental property in the US?
It is possible for a Canadian investing in US real estate to own a rental property in the US; it is important to carefully consider the legal and tax implications of investing in US real estate as a foreigner and to work with qualified professionals to ensure compliance with all applicable laws and regulations.
9. Is US rental income taxable in Canada?
Yes, US rental income earned by a Canadian resident is generally taxable in Canada. This is because, under the Canadian tax system, Canadian residents are subject to tax on their worldwide income, including income earned from outside of Canada. However, Canada and the United States have a tax treaty in place to prevent double taxation on income earned in both countries. The tax treaty provides guidelines for determining which country has the primary taxing rights on specific types of income, including rental income.
10. How do Canadian investing in US real estate avoid US Estate tax?
Canadian residents who own assets in the United States may be subjected to the US estate tax upon their passing. The US estate tax is a tax on the transfer of property at death and can be quite substantial, with rates ranging from 18% to 40% of the taxable estate.
11. Can Canadians get a mortgage for US property?
Canadian investing in US real estate may be eligible to get a mortgage for US property. Each lender has their own set of eligibility criteria and requirements, but the applicant generally must have a good credit score and sufficient income to qualify. They may also need to show proof of funds or other assets necessary to purchase the property.
12. Can I invest in US real estate as a Canadian?
Yes, Canadians can invest in US real estate without becoming US citizen or permanent residents. However, it is important to understand such an investment’s legal and financial implications before proceeding.
13. How long can a Canadian stay in the US if they own property?
As a Canadian investing in US real estate, you can stay in the United States for up to six months per calendar year (January 1st to December 31st) without needing a visa or any special permission, regardless of whether or not you own property in the US. However, if you plan to stay in the US for more than six months per calendar year, you will need to apply for a visa or seek permission from US immigration authorities. Owning property in the US does not affect the duration of stay allowed under the visa waiver program for Canadian citizens.
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