Canadian investment in U.S. real estate has surged significantly within the past few years, rising from $9.5 billion in 2012 to almost $12 billion in 2013. This nearly 25 percent jump is a welcome sign for U.S. property developers as well as Canadian investors — the most active foreign investors in the American real estate market since 2010, contributing nearly a third of the $90.6 billion invested between 2010 and 2013.
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There are several known factors that contributed to this recent increase in Canadian real estate demand. First on the list is the relative value of U.S. real estate, as prices lowered significantly during the hard-hitting economic recession and have only recently begun to recover. Since Canadian real estate markets are smaller, any investors seeking promising real estate began having better luck searching in the U.S. rather than in their home country. Combined with a strong Canadian dollar, American real estate investments are appearing more promising for investors of all ages, including future retirees who are looking to own vacation or retirement properties.
A major concern for some looking to buy real estate in the U.S., however, is estate tax. Even Canadian residents may be liable for U.S. estate taxes on any American assets owned at the time of death if proper estate planning is not taken into account. In addition, the U.S. gift tax has been problematic for some buyers, requiring those who give American property as gifts to pay a substantial tax rate.
There are a few available strategies that can help avoid some of these problems, however. First, you can avoid holding real estate in a Canadian corporation. The Canadian Revenue Agency assesses a taxable benefit equal to the fair market rent on the property each year, making corporate ownership an unwise investment strategy.
Investors may also avoid joint ownership of U.S. real estate property, as it can create even more estate tax issues if one owner dies. A Canadian partnership is one option, which may help sidestep some estate tax problems. However, because this does bring the risk of the IRS looking through the partnership structure to assess estate tax on each partner individually, it's best to speak with a tax professional about this strategy.
Finally, using a trust to hold U.S. real estate is a preferable way to avoid estate tax. The trust should be set up before acquiring the property, and the property should then be acquired by the trust right away to sidestep complications. It's a good idea to avoid earning rental income on a property held by a trust if you're concerned about triggering any taxable benefits.