Buying Real Estate in the US

Dale Walters

Description

How do snowbirds buy property in the US without severe tax consequences, or even bigger problems? With so many snowbirds as possible buyers, anyone thinking of buying foreign property should consider protecting themselves with the facts.
Buying property in the US can be complicated for Canadians, but the author will cover five main points that will make it easier: 1) the opportunity, 2) how to own the property, 3) US withholding tax, 4) nonresident US estate tax, 5) income tax consequences.
If you are a Canadian interested in owning US property, Buying Real Estate in the US: The Concise Guide for Canadians will help you navigate the daunting legal and tax issues surrounding buying US real estate as a foreign buyer. This book will guide you on a safer, clearer, and more economical path to reaching your goal of owning real estate in the US, while avoiding the possibly severe tax consequences and many other complications that may arise in the process.
The author covers information crucial for Canadians becoming US property owners, such as:
• The opportunity and how it presented itself
• How to own the property
• US withholding tax
• Nonresident US estate tax
• Income tax consequences
If you find yourself confused when thinking about these issues, this book will empower you to become a confident and well-informed buyer, ready to face the US real estate market. The author explains what you need to know, from the lucrative opportunities of investing in US property to specific tax filing requirements.
Use the comprehensive and practical information in this book to ensure you experience enjoyment not hassle when becoming a US property owner.
Introduction xiii
1 A Rare Opportunity 1
1. How the Opportunity Was Created 3
2. The Three Types of Real Estate Transactions 6
2.1 Traditional sale 7
2.2 Short sale 7
2.3 Foreclosure or bank-owned property 10
3. The Window of Opportunity 10
2 Ways of Owning Real Estate 13
1. Direct Ownership through an Individual
or Individuals 16
Contents
e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e
vi Buying real estate in the US
2. Types of Ownership 17
2.1 Community property 17
2.2 Community property with rights of survivorship 17
2.3 Ways to purchase an asset in common-law
property states 18
3. Indirect Ownership Using Canadian Entities 20
3.1 Canadian corporation 20
3.2 Canadian limited partnership 21
3.3 Canadian inter vivos trusts 22
4. Indirect Ownership Using US Entities 22
4.1 Limited Liability Company (LLC) 23
4.2 US corporation 23
4.3 Revocable living trust 24
4.4 Limited Liability Partnership (LLP) and
Limited Liability Limited Partnership (LLLP) 25
3 Income Taxes 29
1. The Basics 32
2. Rental Income 35
2.1 Direct ownership 35
2.2 Indirect ownership 43
3. Selling the Property 55
3.1 Foreign tax credits 56
4. State Income Taxes 60
5. Sales Taxes 62
4 Nonresident US Estate Tax and Probate 63
1. Green Card Holders 66
Contents vii
2. As a Nonresident, When Are You Subject to
US Estate Tax? 67
2.1 The US-Canada Tax Convention (Treaty)
Article XXIX B (Taxes Imposed by Reason
of Death) 69
2.2 How the US nonresident estate tax works 76
3. A Dollar Is Not Always a Dollar 80
4. Probate 83
4.1 State-specific rules of probate 85
5 Other Information You Should Know 87
1. Department of Commerce Filing Requirements 89
2. Overview of the Buying Process 90
2.1 Title insurance 96
2.2 Finding a real estate agent 96
2.3 US mortgages 97
2.4 Foreign currency 98
3. Hiring a Property Manager 100
Conclusion 103
Appendix I: Checklist for Buying Real Estate in the US 105
Appendix II: Resources 107
About the Author 111
viii Buying real estate in the US
Samples
1. Treaty-Based Return Position Disclosure (Form 8833) 33
2. US Nonresident Alien Income Tax Return
(Form 1040NR) 37
3. Certificate of Foreign Person’s Claim That Income Is
Effectively Connected With the Conduct of a Trade
or Business in the United States (Form W-8ECI) 42
4. Application for IRS Individual Taxpayer
Identification Number (Form W-7) 44
5. Schedule K-1: Partner’s Share of Income,
Deductions, Credits, etc. (Form 1065) 46
6. Annual Return for Partnership Withholding Tax
(Form 8804) 49
7. Foreign Partner’s Information Statement of
Section 1446 Withholding Tax (Form 8805) 51
8. Partnership Withholding Tax Payment Voucher
(Form 8813) 52
9. Foreign Income Verification Statement (Form T1135) 53
10. Application for Withholding Certificate for
Dispositions by Foreign Persons of US Real
Property Interests (Form 8288-B) 57
11. Foreign Tax Credit (Form 1116) 58
12. United States Estate Tax Return (Form 706-NA) 78
13. Claim for Exemption (Form BE-15) 91
14. Questions to Ask Potential Property Managers 101
Tables
1. Summary of the Pros and Cons of Each
Ownership Type 27
2. Tax Filing Requirements 61
3. Which BE-15 Form to File 95

Sujets

• Real estate
• LAW

Informations

• Publié par: Self-Counsel Press
• Date de parution: 15 octobre 2016
• Nombre de lectures: 0
• EAN13: 9781770407664
• Langue: English
• Poids de l'ouvrage: 1 Mo

Extrait

Buying Real Estate in the US
The Concise Guide for Canadians
Dale Walters, CPA, PFS, CFP®
Self-Counsel Press (a division of) International Self-Counsel Press Ltd. USA Canada

Copyright © 2016

International Self-Counsel Press All rights reserved.
Contents

Cover

Title Page

Introduction

Chapter 1: Why the US?

1. US Housing Appears to Be a Bargain

Table 1: A Comparison of Housing Costs

2. Short Sales and Foreclosures

3. Currency

4. Before You Get Started

Table 2: Canadian Dollar in US Funds (Annual Average)

Chapter 2: Forms of Real Estate Ownership and Factors to Consider when Choosing

1. Types of Ownership

Table 3: States That Allow Transfer on Death (TOD), a.k.a., Beneficiary Deed

Table 4: States that Allow Ownership as Tenants by Entirety

2. Protecting Your Assets

3. Pros and Cons of Different Entities (As It Relates to Canadians Buying US Real Estate)

Table 5: Summary of the Pros and Cons of Ownership Types*

Figure 1: Basic Decision Tree

4. Owning Multiple US Properties

5. Investors with Worldwide Assets Greater Than the US Exemption Amount

Figure 2: Two-Tiered Limited Partnership

Chapter 3: Income Taxes

1. The Basics

2. Rental Income

Sample 1: US Nonresident Alien Income Tax Return (Form 1040NR)

Sample 2: Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States (Form W-8ECI)

Sample 3: Application for IRS Individual Taxpayer Identification Number (Form W-7)

Table 6: Tax Tables

Sample 4: Schedule K-1 (Form 1065)

3. Frequently Overlooked Deductions

4. Taxes on Selling the Property

Sample 5: Application for Withholding Certificate for Dispositions by Foreign Persons of US Real Property Interests (Form 8288-B)

Table 7: Tax Filing Requirements

Sample 6: Form T1135

Sample 7: Form T1134

Chapter 4: Nonresident US Estate Tax and Probate

1. Green Card Holders

2. As a Nonresident, When Are You Subject to US Estate Tax?

Sample 8: United States Estate (and Generation-Skipping Transfer) Tax Return (Form 706-NA) (Example 1)

Sample 9: United States Estate (and Generation-Skipping Transfer) Tax Return (Form 706-NA) (Example 2)

3. A Dollar Is Not Always a Dollar

Table 8: Unified Estate and Gift Tax Rate Schedule

4. Probate

Chapter 5: Other Things You Need to Know

1. Other Filing Requirements

Sample 10: Claim for Exemption (Form BE-15)

Table 9: Which 2015 BE-15 Form to File

2. Other Filings

3. Overview of Issues That May Come Up in the Buying Process

4. Hiring a Property Manager

5. Alberta Reciprocal Enforcement of Judgments Act and Other Reciprocal Laws

Conclusion

Appendix I: Checklist for Buying Real Estate in the US

Appendix II: Resources

Cross-Border Tax Help

US Tax Resources

State Tax Sites

Canadian Tax Resources

For Renters

Other Resources

About the Author

Acknowledgments

Notice to Readers

Self-Counsel Press thanks you for purchasing this ebook.
Introduction

Thanks to the questions and comments I have received since the first edition of the book, I have added new information and clarified existing information. Though much has been added, the book still provides concise information in an easy-to-read format.
Many Canadians have a goal of buying a home in the United States to get some relief from the long and cold winters in Canada. Dreams of days on or near the ocean, or daily rounds of golf in sunny and warm destinations in the US Sunbelt, have inspired Canadians to buy second homes in places like Palm Springs, Phoenix, San Padre Island, and numerous locations throughout Florida.
With record or near-record prices for real estate in Canada, US real estate is a bargain, whether you are simply buying a second home or you are looking to invest in a number of properties. While plenty of opportunity exists, there are several potential pitfalls if you fail to plan or use competent professionals to help you through the process. In many ways, the process seems obvious with few, if any, roadblocks. In fact, it is so easy that many Canadians choose not to seek proper advice, or they get bad advice from people who do not specialize in this area.
An adage I have long lived by is, “just because you can, doesn’t mean you should,” and that adage is particularly applicable in this situation. On a regular basis I get questions that go along the lines of, “can I do that with the property?” The answer is, nearly always, yes you can do that, BUT you shouldn’t. For example, if you asked your realtor whether you can own a property in your corporation, he or she would say yes (which is the correct answer), but would not know to add that you should not own the property in the corporation because it would cause double taxation. If you get nothing else out of this book, I want you to get the fact that you need, first and foremost, to hire knowledgeable professionals to assist you through the process and to change your questions from “can I do this?” to “should I do this?”.
While I attempt to answer the most common questions, it is impossible to answer every possible scenario that may arise. Every situation is different; do not rely on the fact that your friend bought a house in a certain way and assume that way will work for you. To begin with, you don’t know if your friend received good advice in the first place. Additionally, your facts, circumstances, goals, and timeframes will likely be different from your friend’s. I strongly recommend that you seek advice that is customized to your particular situation.
When seeking advice, look for a professional with a substantial amount of cross-border experience. There is a clear pattern that can be seen among the Canadians I talk to; an advisor on one side of the border may give perfectly good advice for one country, but give bad advice overall because he or she did not understand the implications on the other side of the border. It is imperative that your advisor fully understands the implications of any advice on both sides of the border.
I have tried to make a complicated and dry subject readable, and hopefully at least a little interesting, through the use of examples and tables summarizing my points. I have also added notes and cautions throughout to make sure you do not miss important points. Appendix I is a checklist for you to use when buying real estate in the US.
This book is written largely from a tax perspective, so the material can be complex in parts and is forever changing. I hope you agree that this is an essential book for Canadians buying real estate in the US; it is through your comments that I am able to add new material and make improvements. For this reason, I would like it if you would provide reviews of the book on www.self-counsel.com , www.amazon.ca , www.amazon.com , or through whatever site you happened to have purchased the book.
Best of luck in your real estate investing endeavors.
Chapter 1
Why the US?

When I first wrote this book in 2010, the US real estate market had just crashed, declining up to 70 percent in some areas. The reasons for investing in US real estate were obvious and there were many opportunities for those with the courage and cash to do so. I would guess that the vast majority of those who bought into the US real estate market from 2009–2011 did very well.
Today, opportunities are not as great as they were back then, but millions of US homes continue to be owned by Canadians for many different reasons. Some want to have a second home where the weather is warm; because prices are still a bargain compared to most Canadian markets; because they need to move for work or business; or because they are simply trying out the cross-border lifestyle before making a decision as to whether they will want to spend their winters (or more) in the US upon retirement.
In this chapter I will lay out why buying real estate in the US may still be a good idea for you. I will briefly discuss how short sales and foreclosures work in the US, and talk about currency and why US currency is mostly likely fairly priced; if you are waiting for the US and Canadian dollars to go back to par again, you may be waiting for a long time.

1. US Housing Appears to Be a Bargain
I am not a realtor and cannot give advice on real estate, but as an accountant the numbers are telling me that if I were to purchase and then rent out a US property, I could charge approximately the same amount for rent (after converting for currency differences), but only have to invest about half as much, or less. In essence, I would be doubling my yield, all other things being equal. For example, if I compare Toronto to Fort Lauderdale I find that instead of having to invest, on average, $526,175 USD ($649,599 CAD x $0.81) to receive a gross monthly rent of $2,167 USD, I can invest $171,800 USD, on average, to receive a gross monthly rent of $2,056 USD. The gross annual rent yield in Toronto is 4.