One of the most common questions we get from Canadians is: “I want to buy US real estate. How do I do it?”
This question is usually asked as though there’s one “right way” to do it. Nope – there are many, many ways to do it, and it’s important to pick the right way – for you.
To get there, we start by asking questions, instead of giving answers. The first question is always “What is the purpose of your US real estate purchase?” Most typically, a person wants one of these:
- Vacation home
- Residential rental
- Commercial rental
Use in an active business
People often come to us thinking it’s just a tax question, but there are a lot of other considerations in buying US real estate.
The real estate itself
Number one is (as always), “location, location, location”. You have to make sure that the property you’re buying is appropriate for your use. Think about size of the unit, proximity to amenities, and the way in which you are going to use it. For a vacation home, will you be using it year-round, for a long season (like the whole winter), or just sporadically? Will you be inviting guests, like children and grandchildren? Do you want to mostly walk, or are you okay driving everywhere? How far is a reasonable drive for you?
If you’re going to rent it out, what is the rental market like in a given area? Are you going to rent out short term (e.g. VRBO) or long term? What do returns look like?
A good real estate agent can help you work through these questions.
Immigration law
If you’re going to spend a lot of time in the United States, you have to make sure you stay on side of US immigration law. Spend too much time, and you may be expelled and not allowed back for a long time.
In general, a Canadian citizen or permanent resident is allowed to spend up to 6 months in the United States on a visitor’s (“B”) visa. But the way the US counts days, short trips to Canada may be counted as US days for this purpose.
Maybe you need a different visa.
State sales and accommodation taxes and regulations
Many states have special taxes on short-term stays. Some have regulations limiting AirBnB type structures, or eliminating them altogether. Others have proposals I the works. Make sure you’ll be allowed to do what you intend to do.
Income tax
If you’re going to rent out the property, you’ll have to comply with US (and state) income tax requirements. There’s withholding tax that has to be collected from the tenants. It’s easy to avoid this step by completing form W-8ECI, but few people remember it, and the penalty for failure to withhold is ugly (US penalties are generally much higher than Canadian ones)
Every year you’ll have to file a US income tax return (for an individual, form 1040NR). Most states have separate forms, but some states, like Florida, Texas and Washington, have no personal income tax).
That’s not the end of it. After that, you have to report your US rental income on your Canadian return (yes, this is a second tax). Canada will give you a credit for the US and state tax you paid. Finally, for those of you lucky enough to live in Quebec, you get to do it all over again.
The cost of this filing means that small real estate purchases for rental are often not financially viable. Think about it. If you buy a US property for $300,000 and rent it out for $2,500/month. If you have expenses of $2,000/month, you’re netting $6,000 for the year. If your tax compliance costs are $2,000 a year (which they easily are), that doesn’t leave you a lot of money. If you’ve got multiple buyers (say, you and your spouse, and maybe a friend or two), your compliance costs go up proportionately.
US estate tax
It doesn’t end there. If you should die while owning the property, the United States has an estate tax. This is not an income tax, like Canada’s deemed disposition tax.
The United States doesn’t have a deemed disposition. Instead, it applies a wealth tax. The tax goes up to 40% of the value (not the gain).
Bear with me here as I digress, because it’s important to know the background.
It is said that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”.[1] Estate tax is applied after someone dies (so he can’t argue with it), and before the heirs receive the proceeds (and for them, it’s found money). Secondly, it is designed to be applied only to “rich” people. So it’s a reasonably popular tax – or at least not as objectionable as some other taxes.
The tax is really designed to apply to American citizens and residents. Here’s how it works for them, in a simplified way:
- First, the individual calculates his total estate value (assets less liabilities);
- Next, the tax is calculated at graduated rates, going up to 40%;
- Then a “unified” credit is subtracted. This credit effectively exempts US$13.61M of value
- A married couple gets credits covering a total of twice this; the credit can be effectively shared.
Canadians
This calculation is modified for a Canadian resident (who is not a US citizen or resident):
- Only US-situs assets are counted (primarily real estate, tangible assets located in the United States, and shares of US corporations);
- A proportionate amount of worldwide liabilities are allowed, based on the ratio of US assets to worldwide assets.
- The unified credit is similarly pro-rated.
- A married Canadian who is passing the US assets to his spouse gets double this credit.
The bottom line is that if a Canadian dies owning US property, and with a worldwide estate of under $13.6M ($27.2M if married), there is no estate tax.
However, filing of an estate tax return is required if the value is over $60,000, even if there’s no tax.
Seventeen states also have estate or inheritance taxes (which are levied on top of the US tax): Hawaii, Washington, Oregon, Nebraska, Minnesota, Iowa, Illinois, Kentucky, Pennsylvania, Maryland, New York, New Jersey, Vermont, Massachusetts, Rhode Island, Connecticut and Maine, as well as the District of Columbia.
Canadian impact of estate tax
As noted above, Canada has its own tax on death. But this tax is an income tax – you are treated as though you sold the property at the time of death, and you pay tax on that deemed gain.
Where the property is located in the United States, the US estate tax is calculated first, Canada allows a foreign tax credit for the estate tax.
However, because the US tax is applied on the value of the property (at up to 40%), and the Canadian tax is applied only on the gain (with rates limited to about 35%), the credit may be far less than the tax.
CRA’s position is that the US tax is creditable only against federal tax, not provincial tax That lowers the value of the credit and increases the net cost of estate tax. Some practitioners say CRA’s interpretation may not be right.
Bottom line: US (and state) estate tax can be costly, so for high-net worth individuals with US assets, planning is needed.
Estate tax threshold change
That $13.1M figure is indexed for inflation, so for 2026 it would probably be around $14M. That means couples with net worth under $28M will usually avoid US estate tax. There are few individuals who are this wealthy, so planning has been a very niche activity.
However, the law – as it stands now – will cause that number to drop by half – to about $7M for 2026. That means many more Canadians will be at risk for estate tax.
Options
There are many different ways to hold US real estate. The appropriate way for you depends upon your particular circumstances, and the manner in which you intend to use the property.
As a general rule, we like simplicity. The simpler a setup, the cheaper and easier it is to create, operate and dismantle. Remember, when the time comes, there’s a good chance everyone involved in the setup is, uh, “gone”.
Again, while tax matters, it’s not just a tax question. The structure needs to reflect your family and business needs.
So here are some of the choices:
- Personal ownership
- Individual
- Joint with right of survivorship
- Tenants in common
- Trust (Canadian or US)
- Corporation (Canadian or US)
- Limited Liability Company
- Partnership
Some are extremely common, such as personal ownership, while others would very rarely be used (corporation or LLC). But they all have their places in the firmament.
To be fully effective, some have to be put in place before purchase. Others can be utilized for properties already owned.
To find out what is right for you, call us at 1.866.840.2527 or request a consultation.
[1] Jean-Baptiste Colbert, Comptroller-General of Finances under King Louis XIV of France.
The comments offered in this article are meant to be general in nature and are not intended to provide legal advice regarding any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate for your circumstances.
About the author
Kevyn is a cross-border tax practitioner with over 35 years’ experience focusing on the intersection between individuals and entities with international tax issues.
His work spans the practical and the academic. He speaks and writes on Canadian and US tax issues, most regularly for Wolters Kluwer (CCH), the Society for Trust and Estate Practitioners and the Canadian Tax Foundation. He has published over 100 papers, including three in major journals that were peer-reviewed.
Shlomi Steve Levy is a Partner of Levy Salis LLP and is a member of the Quebec Bar, the Law Society of Ontario (L3), the Society of Trust and Estate Practitioners, and the Canadian Bar Association.
