Investing in real estate is a great way to diversify your portfolio, and for foreign investors, there are many opportunities in the US and Canada. However, it’s important to understand the tax implications of foreign investment in real estate in both countries. In this blog post, we’ll explore the tax implications for foreign investors in US or Canadian real estate.

Foreign Investment in US Real Estate

Foreign investors are subject to US federal tax on their rental income from US real estate. The tax rate is generally 30%, unless the foreign investor elects to be treated as engaged in a US trade or business. If the foreign investor makes this election, they are taxed at the graduated rates applicable to US taxpayers. However, making this election triggers a number of additional reporting requirements, so it’s important to consult with a tax professional to determine whether this election is the best option.

Additionally, when a foreign investor sells US real estate, they may be subject to US federal income tax on any gain from the sale. The tax rate on this gain is generally 20% for long-term capital gains, and 37% for short-term capital gains. If the foreign investor is engaged in a US trade or business and the property sold is used in that business, the gain may be subject to a higher tax rate.

Foreign Investment in Canadian Real Estate

Canada has a similar tax system to the US for foreign investors in real estate. Non-residents are subject to a withholding tax of 25% on rental income from Canadian real estate, which can be reduced if the foreign investor files an income tax return in Canada. The tax rate on capital gains from the sale of Canadian real estate is also generally 25%, although this rate can be reduced if there is a tax treaty between Canada and the investor’s home country.

One unique feature of the Canadian tax system is the concept of “deemed disposition”. Under this rule, if a non-resident dies owning Canadian real estate, the property is deemed to have been sold at fair market value immediately before the death, and the estate may be subject to Canadian tax on any resulting gain.

Navigating Foreign Investment in US or Canadian Real Estate

Foreign investment in real estate can be a lucrative opportunity, but it’s important to navigate the tax implications to ensure compliance with US and Canadian tax laws. Seeking the advice of a tax professional can help investors understand the best strategies for minimizing their tax liability and maximizing their profits.

At JTT Accounting, we specialize in international tax planning and compliance, and can assist foreign investors in navigating the complexities of investing in US or Canadian real estate. Contact us today to schedule a consultation and learn more about how we can help.