Buying US Rental Property Personally, Through an LLC or Through a Canadian Corporation

Canadians buying a US rental have three ways to hold it: in their own name, in a US limited liability company, or in a Canadian corporation. Each answers a different question, and none of them is free of side effects. This post lays out what each one does. It isn't advice on which to choose, because that depends on your income and how many properties you plan to own.

Plan on paying a cross-border accountant to model this before you buy. A wrong structure can cost far more than the fee, and it's hard to change after closing.

Owning it personally

This is the simplest. The title is in your name, the lender and title company are used to it, and you file the US and Canadian returns described in the main guide and walked through in US rental income tax for Canadians.

The downsides are liability and estate exposure. If a tenant or visitor sues, your personal assets are in play, so you'd want strong landlord insurance and an umbrella policy on top. And a non-resident who owns US property personally has it counted in their US estate. For most investors with a few modest properties that doesn't trigger a tax bill, though it can still mean a filing.

A US LLC

An LLC limits your personal liability if something goes wrong at the property, and US lenders and title companies see them all the time, so closings go smoothly.

For a Canadian, though, there's a known tax problem. The IRS treats a single-owner LLC as invisible, so the rent flows straight to you and you file as an individual. The CRA treats the same LLC as a corporation. That mismatch can make it hard to claim a Canadian foreign tax credit for the US tax you paid, which can leave some of the income taxed in both places. It doesn't always come up when an LLC is pitched to a Canadian buyer. Some accountants work around it with a different structure layered on top. Others tell clients to hold personally and carry insurance.

There are also extra filings. A US LLC owned by a foreign person has to file Form 5472 with a pro forma Form 1120 for any year it has a reportable transaction with you, such as money you put in or take out. That covers almost every year, even one with no profit. Missing it costs US$25,000. And the state charges its own fees, which range from under US$100 a year to several hundred.

An LLC also doesn't remove the US estate exposure by itself. So you're paying for liability protection that a good insurance policy partly provides, and in exchange you're taking on tax mismatch and filings. Some investors still find that worth it, especially once they own several properties.

A Canadian corporation

Some investors put the property inside a Canadian company, partly because shares of a Canadian corporation aren't treated as US property for estate tax. That's the main reason it comes up.

The costs:

• Rental income earned by a corporation is passive income, and in Canada it's generally taxed at a high corporate rate, with part of that tax refundable later when you pay it out as a dividend. If a small company's passive income goes above C$50,000 a year, its small business deduction starts shrinking, and it's gone at C$150,000.
• The US also taxes a foreign corporation's US rental profits at regular corporate rates. On top of that sits a branch profits tax. The treaty cuts it to 5% and may exempt the first C$500,000 of cumulative earnings, so ask your accountant whether that exemption covers rental profits.
• Some US lenders won't lend to a foreign corporation, or want a larger down payment and a personal guarantee.
• You'll pay for more accounting on both sides.

For a Canadian who already runs a corporation with other income, it can make sense. For someone buying one rental, it usually doesn't.

Side by side

That's a summary, and the details differ by situation.

Insurance first

Whatever you choose, get landlord insurance with enough liability coverage, and think about an umbrella policy. Insurance covers the risk a lawsuit poses to your other assets in most ordinary cases, and it costs a few hundred dollars a year. Structure protects less than people assume, especially when you personally guarantee the loan, which lenders often require anyway.

What to ask

Bring these to your accountant and your attorney:

1. If I hold this personally, what's my expected total tax across both countries?
2. If I use an LLC, how will the CRA treat it and will I get a foreign tax credit?
3. Does my estate size make US estate tax a concern?
4. What does the lender I'm using accept?
5. What does each structure cost to set up and maintain each year?

The same questions are in the Canadians Investing in US Property Checklist. To run the deal itself, use the calculator, and add the accounting and filing fees as an annual cost before you decide it works.