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HOW TO STRUCTURE BUYING YOUR US PROPERTY?

HOW TO STRUCTURE BUYING YOUR US PROPERTY?

The main thing you want to evaluate is which entity structure will allow you to pay the least amount of taxes.  However, each entity structure has its own pros and cons depending on your own situation.

The main issue you want to avoid is double taxation, which is being taxed in the US and then eventually being taxed in Canada.  This will take a huge bite out of your return on investment and profits.

The issues you want to address as a Canadian buying US real estate are the following:

  • Reducing the amount of taxes paid today and in the future in both the US and Canada
  • Liability issues
  • Estate Planning

You may be wondering why liability issues matter at all but please remember that over 90% of all lawsuits globally are from the United States.

Prior to closing, a homebuyer who is purchasing property in Florida must consider numerous matters. One of the most important things to consider is how they are going to take title on the real estate property.  There are many ways in which a property can be owned and each method has its own pros and cons and complexities.

 

Single ownership

Title to real estate property can be taken in a person’s own name, which is generally referred to as sole ownership personally. Unmarried persons legally divorced persons and married persons who wish to hold the property in their own names may use this form of ownership. However if a married person takes title in his or her own name, at the time he or she resells the property his or her spouse will have to relinquish his or her rights to the property due to Florida’s homestead laws depending on if it applies to you and the reason for your property purchase.

 

Joint ownership

Buying Florida real estate with another individual is joint ownership.  Each owner has the right to sell or lease their ownership interest to heirs.

 

Other forms of ownership

Title to Florida property may also be held in the name of a separate legal entity organized under Florida state law such as a corporation or a limited liability company. Corporations and limited liability companies can have any number of shareholders or members, respectively, but the rights to the property of individual shareholders or members will be limited to the face value of shares or membership interests held by them.

Alternatively, a Cross-Border Trust is a special way to hold title to property. When you own a property, you really own a bundle of rights, some of which are vital and some of which are not important. A Trust separates those rights between you and a Trustee, giving you all the important rights, like possession, income, the right to sell and devise the property. It gives the Trustee (usually you anyway), one of the unimportant rights, what I call the “bare naked title.”

Finally, the title may also be held in the name of a Florida Land Trust, in which the legal title of the property is transferred to a trustee for the benefit of the named beneficiaries. Some people prefer to take title in the name of a Florida Land Trust because it offers privacy with no one knowing the beneficial owner of the property or the amount of the purchase price paid for the property.


Limited Liability Corporations

This is the most common structure US residents use to purchase US real estate. This allows US residents to be protected from liability yet be taxed as an individual and not a corporation.  More importantly, the Canada Revenue Agency does not recognize US LLC’s.  Therefore, you will be faced with double taxation as any US taxes you pay will not be credited against your Canadian taxes paid.

 

C Corporations

C Corporations are taxed at high rates, almost 35% in some cases.  Also, capital gains are not used to your advantage to reduce potential taxes.  Nevertheless, you are protected from personal liability issues.  However, in most cases, there are better ways to structure US real estate purchases.

 

S Corporations

This is only for US residents.  No need to learn more about this as a Canadian buyer.
The best ways to structure US real estate purchases for Canadians are:

  • Personally
  • Canadian Limited Partnership
  • US Limited Partnership
  • US General Partnership
  • Two tier limited partnership
  • Trusts

 

Buying US real estate Personally

Buying US real estate personally can be as simple as simply buying a property in the US.  Simple as that.  You will save on legal and accounting costs of more complicated structures.  If you plan to use this property as a second home and not rent it out, then you don’t need to worry much about taxes yearly except for when you sell the property.

If you do rent out the property, then you will pay US taxes on the net rental income each year.  US personal taxes are lower than Canadian personal taxes.  Furthermore, for the US taxes paid, you will receive a credit against your Canadian taxes paid.

If you own the property for longer than 12 months, the US capital gains tax of 15% applies when you sell the real estate.  This tax is credited against Canadian capital gains tax due for the sale of the real estate.

The important thing to remember is double taxation is avoided.

Tip: US taxes are generally lower than Canadian taxes.  Since you receive credits, your net financial position is not impacted, other than cash flow requirements to funds these taxes before the credits are received.

 

Each US state has their own state income tax.  Florida, Nevada, and Texas do not have state income tax.  However, Arizona does have state income tax.

Withholding taxes may be required if you buy US real estate personally and US estate taxes may apply if you die and own US real estate.  Moreover, if there is liability with respect to your US real estate, you can be personally liable.

 

Limited Partnerships

Buying US real estate through a limited partnership protects you from personal liability in the event you are sued due to a property related issue.  In Canadian limited partnerships, Canadians are taxed personally for the rental income earned in the US.  The partnership has to file an information tax return in the US and Canada.

If the property is owned for more than 12 months, the personal capital gains tax rate of 15% applies.  You do not have to pay high corporate tax rates.

If you setup a Canadian Limited Partnership, withholding tax still applies.  If you setup a US Limited Partnership, then estate taxes may apply to you depending on your situation.


US General Partnership

Another alternative for Canadians is to use a US General Partnership which essentially combines a Canadian Limited partnership with a US C Corporation as the partner.  The main advantage of this is that there is no withholding tax requirement.  US estate taxes may apply depending on your situation.

 

Two Tiered Limited Partnership

A two-tiered limited partnership comprises of a American Limited Partnership comprised of a Canadian Limited Partnership as one of its members.  Setting up this structure is complicated.  The main benefit of this structure is that you can avoid estate taxes.  This option allows you to report income personally and also allows you to sell the property at a capital gains tax rate.

 

Trust

A trust is when real estate property is held by someone but the benefit of that property is for someone else.  A trust essentially allows you to pass on real estate property to your beneficiaries even if you are not yet dead.  When you die, the real estate passes on to your beneficiaries as outlined in the trust.

 

Partnership Structure to Buying US Real Estate

If a Canadian partnership is buying US real estate and if one of the partners is using it personally, the claim would be that the partnership is not in the US and therefore the Canadian partner does not have to pay US estate taxes.  This area of law is still up for debate at times and not everyone agrees.

Another option could be for the partnership to have corporate status for US tax purposes.  Essentially, the partnership would be a foreign corporation and would not have to pay US estate taxes.

This can also be effected at times after  a partners death, which would allow personal income tax rates to apply on the gain on the sale of the property but can then shield US estate taxes being paid.  The strategy is complex to setup.

 

Cross-Border Trusts

A cross-border trust holds property in one country for a person in another country. In the case of Canadians owning property in the U.S., giving the “bare naked title” to someone who is not a Canadian human creates advantages in the area of probate-avoidance and can also create tax advantages.

 

Below are some reasons why you might want to use a Cross Border Trust to buy Florida real estate?


Death (Probate Avoidance)

If you die holding US property, you will have to have a probate in every US state in which you have property. Having a probate is not the end of the world, but it is a lot of work and can be expensive. Many people feel that it is easier to “do your probate now”, because it’s a lot easier and cheaper. If you do it now, you can “privatize” the probate process into a simple document (the trust) with simple instructions like “When I die, give the beach condo to my wife. When she dies, give it equally to my children”. Your Trustee simply deeds the property to your wife and then, when she dies, your Trustee simply deeds the property to the children.

This is easier and cheaper than going to probate, where the same essential thing gets done, but it is done by a Judge. Judges require you to file lots of papers. They make you have hearings, legal announcements, inventories and lots of other things. In Probate Court, there are all kinds of waiting periods and lots and lots of rules and requirements. You’ll probably need a lawyer involved. A Trust is a “Privatized Pre-Death Probate,” which replaces all of this with a simple deed by the Trustee to your beneficiaries.

 

Taxes

Very simply, a cross border trust can save you taxes if you are in certain tax brackets. In the US, everybody gets a credit against death taxes. Each spouse in a married couple gets one credit, but that one credit goes unused if the property of the first spouse to die is transferred directly to the surviving spouse without going through a trust first. So if your taxable estate is bigger than one tax credit, this Trust will save you on your death taxes.

A cross border trust can also save you income taxes, because it can turn your “personal” property into business property, allowing for deduction of the interest and other expenses that are not allowed to be deducted in Canada on personally-held real estate.

 

Other Considerations 

Other clauses can be put into your trust that do other things you might need or want done. You can protect spendthrift beneficiaries, by instructing your Trustee only to give out money for certain purposes, like education and health care. You can provide for a beneficiary that has special needs. You can prevent distributions to spouses of beneficiaries. You can provide special instructions upon your death, or upon the happening of other events, such as beneficiaries reaching a certain age. You can provide for distributions only to beneficiaries whose assets are below a certain amount. There are many other provisions you can include.

 

2) Florida Land Trust

The Florida Land Trust is a simple and inexpensive solution for holding legal title to real estate or personal property. The Florida Land Trust is a fully revocable grantor trust drafted specifically to buy, hold, finance and sell Florida real estate or other personal property in a confidential or private manner pursuant to the Florida Land Trust Act that was adopted by the Florida legislature in 2006.

The State of Illinois was the first jurisdiction within the United States to formally recognize and codify the Land Trust, so you will often hear the Land Trust referred to as the Illinois Land Trust. You may also hear it referred to as the Title Holding Trust, especially in California.

There are many benefits of buying and holding property in a Florida Land Trust. The most common use is to keep your ownership interest of Florida real estate or other personal property confidential and private because the Florida Land Trust keeps your name off the public record. Holding property in a Florida Land Trust also limits most of the liability associated with real property ownership while retaining most of your rights of ownership including, legally claiming the Homestead exemption if the property is your primary residence.

The benefit of a Florida Land Trust

There are well over a dozen benefits to hold property in a land trust. The top twelve at a glance include but are not limited to:

1. Privacy and anonymity of ownership – Unlike a corporation or limited liability company there is no public record of beneficiaries. Title appears in the name of the Trustee and there are no requirements to register the trust.

2. Ease of buying foreclosure or short sale properties – Many times banks will approve short sales or foreclosure purchases but prohibit the substitution of buyers on the subsequent transfer of title for a time certain. A Land Trust may keep the same Trustee, yet allow the beneficial interest to be sold without violating the bank approval.

3. Ease of avoiding judgments and liens on the property– Land Trusts allow individuals with judgments or tax liens to buy and sell freely without having judgment liens attach to their property.

4. Ease of control by multiple owners – Rather than requiring multiple signatures, only the Trustee is required to sign contracts and related paperwork.

5. Ease of avoiding two sets of closing costs – Documentary stamps as well as title insurance may be avoided whenever there is a simultaneous closing.

6. Ease of management in the event of conflict – Land Trust Agreements can provide buy out provisions in the event of death or conflict among property owners.

7. Ease of maintenance – Unlike corporations or Limited Liability Companies, land trusts do not have annual filing fees with the state. Additionally, they do not require a seperate tax I.D. or an additional tax return to be filed.

8. EASE OF PROBATE AVOIDANCE – Unlike owning property in one’s individual name contingent beneficiaries are listed in the trust document similar to a beneficiary designation on an insurance policy thereby avoiding probate.

9. Ease if managing the disability of trustee or beneficial owner – Contingent Trustees may be listed in the event the Trustee becomes incapacitated mentally or physically thereby avoiding court proceedings.

10. Ease of changing contingent beneficiaries– Since Land Trusts avoid probate they often serve as a Will substitute and can be amended at any time without having to change the deed.

11. Ease the simplication of making gifts – Land Trusts, if desired, can be excellent estate planning tools to gift assets out of an estate to minimize or reduce estate tax without sacrificing or giving up cash.

12. Favorable tax rate – Unlike a “corporation” or a foreign corporation, beneficial owners of a land trust including foreign nationals are only taxed at the favorable individual capital gain rate which is presently 15%.

The only caveat to creating a Florida Land Trust is if the Trust is owned by a Florida Resident that wishes to homestead the property. Unlike a typical “Revocable” or “Living Trust” property appraisers often view the beneficial interest as being a “Personal Property Interest” rather than “Real Property Interest”. As a result, the Land Trust may not qualify for the homestead exemption depending on the county where the property is located. In short, depending upon circumstances, when buying or flipping a foreclosed or short sale property or dealing with a foreign buyer, a Florida Land Trust has great flexibility that it often is the best method to purchase and title real estate in the State of Florida. For an initial set up and design fee of $500.00 it may be the best investment a buyer can make

 

Who Can Set-up a Florida Land Trust?

The Florida Land Trust can be set-up and used by any individual, any group of individuals, any general partnership, any limited partnership, any other revocable or irrevocable trust, another trustee or trust services provider such as an out-of-state trust company or bank, any limited liability company (LLC), any corporation, or any other type of business entity.

The natural person or legal entity that established a Florida Land Trust is commonly referred to as the Trustor, Grantor or Settlor (“Trustor”). The Trustor is generally the Beneficiary as well.

 

 

Who Serves as Trustee of the Florida Land Trust?

The Land Trust is created through the execution of two documents: 1) a Deed in Trust, where the real property is conveyed into the name of the Trustee in its fiduciary capacity as Trustee (not in its corporate capacity), and 2) a Florida Land Trust Agreement pursuant to which the Trustee administers the terms of the Land Trust.

 

Who Owns the Florida Land Trust?

The Beneficiary (ies) owns the Florida Land Trust. All ownership rights, often referred to as the benefits and burdens of ownership, are retained by the Beneficiary (ies) of the Florida Land Trust. The Beneficiary (ies) retains the power of direction over the trust unless they choose to delegate the power of direction to another individual or entity.

 

Who Has the Power of Direction?

Generally, the Beneficiary retains the full and complete power of direction over the Florida Land Trust unless the Beneficiary chooses to delegate the power of direction to another individual or entity. The Trustee merely holds legal and equitable title to the real property or personal property subject to the written authorization and direction of the Beneficiary or any party that has a power of direction.

 

How Does the Florida Land Trust Work?

The Trustor enters into a standardized Florida Land Trust Agreement with Exeter Fiduciary Services, LLC. The Trustor appoints or names Exeter Fiduciary Services, LLC as Trustee of the trust, designates one or more Beneficiaries (owners) of the trust and can also appoint or name one or more Successor Beneficiaries under the trust. The initial Beneficiary is generally the Trustor and the Successor Beneficiaries are generally the Trustor’s children, but could be anyone designated by the Trustor.

The Beneficiary (ies) of the Florida Land Trust retains complete control over the real estate or personal property held in the trust. They manage the property or retain agents to manage the property on their behalf. They collect and distribute any income and pay any and all expenses. They insure, develop, finance, lease or sell the real estate as they see fit.

The trust may be modified, updated or terminated at anytime. Additional real estate or personal property can be added to the trust at anytime. The Trustee executes grant deeds, promissory notes, deeds of trust, leases and otherwise deals with the property held in the trust only upon specific written authorization and direction from the Beneficiary (ies) of the trust.

The beneficial interest(s) in the Florida Land Trust is personal property and not real property. This beneficial interest includes the right to receive any income and any proceeds from the sale or mortgage of the property. The Beneficiary (ies) reserves the right to live on or otherwise possess and use the real estate. Their beneficial interest in the trust, as personal property, can be easily assigned to another party without the need to prepare, sign, notarize and record a Warranty Deed.

 

When Should the Florida Land Trust be Set-up?

The most effective way to use the Florida Land Trust, especially when confidentiality or privacy of property ownership is a primary concern, is to have the Florida Land Trust acquire and hold title to the real or personal property upfront when you initially acquire it. This way the Beneficiary’s (owner’s) name will never appear on any recorded document, legal title or public record. The Florida Land Trust can be set-up at any point in time, however, in order to take advantage of the other benefits of acquiring and holding real or personal property in a Florida Land Trust.

 

Income, Transfer or Gift Taxes or Property Assessments

The Florida Land Trust will not get around or avoid any kind of income, transfer, or gift tax consequences or any kind of property assessments or reassessments that would otherwise be due and payable if the property were conveyed and not held in a Florida Land Trust.

 

Due on Sale Clauses

The Florida Land Trust will not get around or avoid any due on sale clause contained in promissory notes secured by the property held in the Florida Land Trust when the beneficial interest is assigned and transferred to another party and the current beneficiary no longer has an interest in the Florida Land Trust. You should have your legal counsel carefully review your loan documentation to ensure compliance with the terms of your promissory note and mortgage.