Investing in US Real Estate Taxes & Legal Traps – Detailed Guide by RC CPA
The Truth About Investing in US Real Estate as a Canadian: What Your Broker Won’t Tell You
Investing in US real estate as a Canadian has become increasingly popular. Lower property prices in certain states, steady rental demand, and USD-denominated returns make the opportunity look attractive on the surface. However, what most brokers, realtors, and even US-based property managers won’t explain is that tax and legal exposure—not property selection—is the real risk.
The US real estate industry is structured primarily for US residents. As a Canadian investor, you are treated as a non-resident alien for US tax purposes, which completely changes how income, ownership, and exits are taxed. Many Canadians assume that buying US property is similar to buying real estate in Canada—this assumption is costly.
Without proper planning:
You may be taxed on gross income instead of profit
You could face double taxation if filings are incorrect
Your estate may be exposed to US estate tax
Improper ownership structures (like LLCs) can trigger punitive tax outcomes
At RC CPA Professional Corporation, we see these issues after the damage is done. This guide is designed to help Canadians understand the real tax and legal traps before committing capital, so your US real estate investment for Canadians is strategic—not reactive.
The Income Trap – U.S. Rental Taxation
Earning U.S. Rental Income: Gross Withholding vs. Net Filing
One of the most misunderstood aspects of investing in US real estate as a Canadian is how rental income is taxed. By default, the IRS does not care about your expenses.
Here’s the trap 👇
Rental income earned by a Canadian from US property is subject to a flat 30% withholding tax on GROSS rent, not net profit.
Example:
Annual rent collected: $50,000
Actual profit after expenses: $15,000
IRS default tax (30% of gross): $15,000
You pay tax as if you made no expenses at all.
This is where many Canadian investors panic and assume US real estate investment for Canadians “isn’t worth it.” In reality, there is a solution—but it must be elected correctly.
The Net Income Election (IRC Section 871(d))
Canadians can choose to treat rental income as Effectively Connected Income (ECI). This allows you to:
Deduct mortgage interest
Deduct property taxes
Deduct insurance, repairs, HOA fees, depreciation
Pay tax on net income, not gross rent
However:
This election must be made properly and on time
You must file a US non-resident tax return (Form 1040-NR) every year
Poor filing can invalidate the election retroactively
Cross-Border Reporting Still Applies
Even after paying US tax, rental income must be reported in Canada. The CRA allows foreign tax credits—but currency conversion, timing differences, and depreciation rules do not align between countries.
This is where dual reporting failures often occur:
Overstated income to CRA
Lost foreign tax credits
CRA reassessments years later
In the US real estate industry, rental income looks simple. For Canadians, it is anything but. Without coordinated US–Canada tax planning, your “cash-flowing” property may quietly become a tax liability.
The Ownership Trap – Why an LLC Is Dangerous
Choosing Your Structure: The Biggest Mistake US Real Estate Investment for Canadians Face
In the US real estate industry, forming an LLC is almost automatic advice. Realtors, attorneys, and even lenders push it as a “safe” and “tax-efficient” structure. However, when it comes to investing in US real estate as a Canadian, this advice can be dangerously wrong.
The core problem is simple:
👉 The US and Canada do not treat LLCs the same way.
The Cross-Border Mismatch
In the US, a single-member LLC is typically disregarded for tax purposes.
In Canada, that same LLC is treated as a corporation.
This mismatch creates serious tax consequences for Canadians involved in US real estate investment for Canadians, including:
Loss of foreign tax credits in Canada
Double taxation on the same income
Inability to deduct US losses against Canadian income
Tax inefficiency on repatriating cash
In many cases, Canadians end up paying full Canadian tax on income that was already taxed in the US—simply because the structure was wrong.
LLCs and Estate Tax Exposure
Another hidden danger is US estate tax. Holding US real estate through an LLC does not automatically protect you from estate tax exposure. In fact, in some cases, it makes planning more complex by converting real property into US-situs intangible property—creating additional valuation and compliance issues.
Better Structuring Requires Planning
Depending on:
Property value
State of ownership
Personal net worth
Long-term exit plans
Alternatives may include:
Direct personal ownership with proper elections
Canadian corporation with treaty planning
US corporation in limited scenarios
There is no one-size-fits-all solution in the US real estate industry for Canadians. Structure must be designed before purchase—not fixed after closing.
The Exit Trap – FIRPTA Withholding on Sale
Selling Your Property: Navigating the 15% FIRPTA Withholding
The most shocking moment for many Canadians comes at the time of sale.
Under FIRPTA (Foreign Investment in Real Property Tax Act), when a Canadian sells US real estate, the buyer is legally required to withhold 15% of the gross selling price and remit it to the IRS.
Not profit.
Not gain.
Gross sale price.
Example:
Property sold for: $800,000
Actual gain: $150,000
FIRPTA withholding: $120,000
This is not the final tax—it’s a prepayment. But the cash flow impact can be severe, especially if the funds are needed for reinvestment or debt repayment.
Can FIRPTA Be Reduced?
Yes—but only with advance planning.
A FIRPTA withholding certificate can:
Reduce withholding to the actual estimated tax
Be obtained before or shortly after closing
Take weeks or months if documentation is incomplete
Miss the timing, and the full 15% is withheld—no exceptions.
Post-Sale Compliance Is Mandatory
After the sale:
A US non-resident return must still be filed
Capital gains tax is calculated properly
Any excess FIRPTA withholding is refunded (often months later)
In the US real estate industry, FIRPTA is often ignored during acquisition discussions. For Canadians, it should be part of the purchase decision itself, because exit taxes directly affect real ROI.
The Final Trap – U.S. Federal Estate Tax
The Silent Threat: U.S. Estate Tax on Death
For Canadians investing in US real estate, the most dangerous tax exposure often isn’t during ownership or sale—it’s at death. U.S. federal estate tax applies based on asset location, not citizenship or residency. This is where many Canadian families are blindsided.
If you die owning U.S.-situs assets—including US real estate—the IRS may impose estate tax before your heirs receive the property.
Why This Is So Dangerous for Canadians
U.S. estate tax rates can reach up to 40%
The U.S. exemption for non-residents is only USD $60,000
Any US property value above this threshold may be taxable
Example:
US property value at death: $900,000
Exemption: $60,000
Estate tax exposure: potentially hundreds of thousands of dollars
Yes, the Canada–US Tax Treaty provides some relief. However:
Treaty calculations are complex
Relief depends on your worldwide net worth
Improper ownership structures (including LLCs) can reduce treaty benefits
In the US real estate industry, estate tax is rarely discussed during purchase. Yet for Canadians, it can wipe out decades of accumulated equity overnight.
Estate Planning Must Be Built In
Proper planning may involve:
Ownership structuring aligned with treaty rules
Life insurance planning to cover estate tax exposure
Coordinated US–Canada estate and tax strategies
If estate planning is ignored at acquisition, fixing it later becomes expensive—or impossible.
Canadian Compliance Requirements
Don’t Forget the CRA: Form T1135 and Currency Fluctuations
While IRS compliance gets most of the attention, Canadian reporting obligations are equally critical when investing in US real estate as a Canadian.
Form T1135 – Foreign Income Verification Statement
If the total cost of your foreign property exceeds CAD $100,000, you must file Form T1135 annually with the CRA.
US real estate typically qualifies as:
Specified foreign property
Even if it produces no income
Even if it is jointly owned
Penalties for non-compliance:
$25 per day (up to $2,500)
Higher penalties for gross negligence
Extended CRA reassessment periods
Currency Is a Hidden Tax Trigger
The CRA requires:
Income reported in Canadian dollars
Gains calculated using FX rates
Capital gains may arise purely due to currency movement—even if the USD price stays flat
This is a major difference from the US real estate industry mindset, which rarely factors in currency-driven tax exposure.
Foreign Tax Credits Aren’t Automatic
US taxes paid do not automatically offset Canadian tax. Errors in:
Income classification
Timing
Depreciation treatment
All can lead to lost credits and double taxation.
For US real estate investment for Canadians, CRA compliance must be coordinated—not handled separately.
The Professional Landscape
Navigating the US Real Estate Industry: Why You Need Dual Expertise
One of the most common—and costly—mistakes Canadians make when investing in US real estate is assuming that one professional is enough. In reality, the US real estate industry operates in silos, and those silos do not communicate well across borders.
A US CPA focuses on:
IRS compliance
State tax filings
FIRPTA reporting
A Canadian accountant focuses on:
CRA compliance
Foreign tax credits
T1135 reporting
Canadian personal or corporate tax planning
What’s often missing is integration.
Why Single-Jurisdiction Advice Fails
A structure that is “perfect” in the US can be inefficient—or even disastrous—in Canada. Similarly, CRA-optimized reporting can conflict with IRS rules if not aligned correctly.
This leads to:
Double taxation due to classification mismatches
Missed elections (like net rental income filing)
Lost treaty benefits
Audit exposure in both countries
In the US real estate industry, advisors rarely model cross-border outcomes. For US real estate investment for Canadians, modeling is essential before the purchase.
What Dual Expertise Actually Means
True dual expertise involves:
Understanding the Canada–US Tax Treaty in practice, not theory
Structuring ownership for both income tax and estate tax
Coordinating depreciation, currency translation, and credits
Planning exits at acquisition—not at sale
At RC CPA Professional Corporation, cross-border planning is not an add-on service. It is the foundation of how we approach investing in US real estate as a Canadian.
Final Takeaway: Plan Before You Purchase
US real estate investment for Canadians can be powerful—but only when it is structured correctly from day one.
The traps are clear:
Gross rental withholding without elections
LLC ownership mismatches
FIRPTA cash flow shocks
US estate tax exposure
CRA penalties and currency-driven gains
Fragmented professional advice
None of these issues are visible on a property listing. Yet every one of them directly affects your real return.
The US real estate industry sells opportunity.
RC CPA Professional Corporation protects outcomes.
Before you purchase, refinance, or sell US property, ensure your plan works on both sides of the border.
👉 Next Step:
If you are considering investing in US real estate as a Canadian—or already own US property—speak with a cross-border tax professional before the next transaction creates an irreversible tax event.
Plan first. Invest second.
