Another Link To Tax Expert on Canadian Owners of US Rental Property
Rental Income and Expense: The Canada-U.S. tax treaty no longer provides overriding provisions applicable to real estate rental income, thus both country’s domestic tax laws apply unmodified. Under U.S. domestic tax law, rental income derived from U.S. real estate is subject to a 30% withholding tax imposed on gross rents unreduced by expenses or losses. However, U.S. law allows the foreign investor the option of filing U.S. tax returns and electing “net basis” taxation and graduated tax rates under the regular or alternative minimum tax rules (a net rental loss may not reduce other income). Once the election is made, it can only be changed with IRS consent and the election applies to all of the investor’s U.S. rental activities. Under Canadian domestic tax law, U.S. rental income is included in a Canadian resident’s taxable income on a net basis (a net rental loss is allowed to reduce other taxable income, except to the extent the loss is attributable to depreciation or “capital cost allowances”). The investor must also take into account gains and losses resulting from currency fluctuations. Any U.S. taxes paid may be credited against Canadian tax attributable to the net U.S. income (amounts not credited may be deducted from taxable income).
Recommended Attorney
Many buyers have asked us for the name of an attorney to help them with various aspects of real estate purchases, including tax advice, the options for holding title and forming a company to limit personal liability. Since I am not an attorney, I cannot give legal advice. The law firm described below frequently works with international clients, and it has attorneys who are Florida Bar board certified in the areas of Real Estate Law, Tax Law, International Law, Immigration Law, and Wills, Trusts and Estates. The contact person is:
G. Steven Brown
Hendry, Stoner & Brown, P.A.
Attorneys at Law
20 N. Orange Avenue, Suite 600
Orlando, Florida 32801
Tel: 407-843-5880
Frequently Asked Questions
1. My friends tell me Canadians pay triple the property taxes US owners pay. Do foreign owners pay higher property taxes?
No. This is one of the most widespread misconceptions there is. There is no higher tax rate for foreign owners. There is however an exemption for owner occupants who own and live in the property. This is known as the HOMESTEAD EXEMPTION and gives owner occupants a discount that amounts to about $700-750 per year
If you do not live in the property over 6 months of the year, you will not be eligible for this exemption. It does not matter where you live, if you do not live in the property. US investor owners pay the same proeprty tax amount as Canadian investors. And it is approximately $700-750 higher than owner occupants.
2. I am afraid my taxes will double when the economy improves and values start to increase.
Although there is no limit as to how fast taxes can fall when values are falling, there is a 10% cap on annual increases. For those with Homestead Exemption above, the cap is 3%. Although it is not common, it is possible for taxes to jump from an artificially low amount for a property that had the 3% cap for many years. This is very rare now that taxes have been falling drastically for 3 years straight. If you read the property listing report carefully, you will see next to taxes there is a remark for HOMESTEAD Y or N. This will tell you if the current reported tax amount reflects a homestead exemption.
3. How will I find a tenant and collect rent from Canada?
I will recommend a property manager to you that specializes in rental property management. They will advertise the property, show the property, interview possible tenants, check credit and references, complete the lease, collect the deposit, and collect future rents. They will also handle repairs and emergencies such as plumbing issues for tenants. If the property is not in rentable condition when you purchase it, they can help arrange paint, repairs, etc....
4. Do I need an attorney to purchase Real Estate in Florida?
Although it is not a requirement, there are many issues to explore including taxes, types of ownership, estate issues, etc. As a Licensed Realtor I am not allowed to offer legal advice or tax advice. Please consult the experts on this page or any qualified professional of your choosing for tax or legal questions.
5. What are HOA fees? They are listed as monthly, quarterly or yearly.
Home Owners Association (HOA) fees are dues which are paid to maintain the common elements of the neighborhood. The HOA fee may include gate if gated, community pool and clubhouse, entrance, playground, tennis courts and whatever else the community has. These are private to the neighborhood and not open to the public. They may be required paid monthly, quarterly, or annual, as the report says.
6. Are there any rental restrictions concerning short term rental or long term rental?
No neighborhood is likely to have restrictions for long term rental. However, short term rental requires licenses, and the area and neighborhood must first be zoned for short term. There are dozens of communities in Kissimmee that allow short term rental. However, there are only a handful in Orlando and most are Condotels in the Disney area. I have many years of experience in Kissimmee and Orlando and am familair with which neighborhoods are approved for short term rental.
7. What is a "Condotel" ?
These are individually owned, resort condos operated as a resort hotel. You may contract the condotel management company to manage your unit but this is generally not a requirement. However, to be successful use of the on-site management company is always recommended. They have the benefit of walk ins, repeat clients, heavy advertising, an established website with the resort name, etc..
All owners must pay HOA dues, whether it is used for short term rental, or only personal use. The HOA covers the gate, amenities, water, garbage, internet, cable TV, and probably phone. They usually cover all but electric in a condotel.
The normal split among many condotels is 40/60. Meaning when they rent it for $180 a night, they get about $72 and you get $108. Remember they have to supply housecleaners, security, free shuttles to Disney and Universal, free continental breakfast, 24 hour front desk personnel, reservation personnel, advertise and maintain website, 24 hour emergency maintenance for issues that may arise anytime, groundskeepers, and more
Many current buyers are purchasing condotels. Many that were selling for $300-500 thousand 3-4 years ago, now sell for $100-140 thousand.
8. Do the banks accept lower offers or will they only consider the price listed?
Banks will consider lower offers but they are not always successful. It is not because the bank will not accept lower. Many bank properties, in good condition, in good areas, priced very low, will receive several offers. Since they have to reveal there are multiple offers, the last few will frequently offer a few thousand above asking. If you place the only offer, and feel confident there will be no others before your offer is answered, you may be succesful with an offer from 5-10% lower than asking price.
Since many properties are selling at discounts of 50-75% off previous values, it may not make sense to lose a very attractive property in great condition trying to save a few thousand more. Example: There are many condos selling for 60-80k that previously sold for over 200k. You may not want to lose one asking 70k, to try to get it for 68k. The bank would likely accept it, but someone else may come along and offer 70k before they reply to your offer. Full price offers tend to get faster replies since that price is already approved.
9. What are Annual CDD Fees? I see these on some of the listing reports.
A Community Development District (CDD) is a local, special purpose entity authorized by chapter 190 of the Florida Statutes as amended. It is an alternative method used by builders for managing and financing the infrastructure required to support community development. As a legal entity a CDD has legal rights such as the power to enter into contracts; own real or personal property; sue and be sued; adopt by-laws; rules and regulations; obtain funds by borrowing; issue bonds and levy assessments.
A CDD will sell bonds, to raise money for infrastructure, such as roads, underground utilities, amenities, etc.. Future homeowners pay these bonds over the next 25-30 years. The annual repayment fee can be either collected separately or added to the property tax bill. The fee is not based on value (non ad-valorem) as taxes are so they never go down or fluctuate much. There are 2 parts to a CDD assessment. One is the part that goes toward retirement of the bond debt which ceases at the end of the bond's term. The other part is on-going because it covers continuing expenses with maintenance of the infrastructure owned by the CDD. This is the part which could vary.
Only about 5-10% of newer neighborhoods have CDDs. I usually do not recommend most neighborhoods with a CDD as it erodes rental profits .
10. What will I need to place an offer?
For cash offers you will need to have what is considered "Proof Of Funds", at the time the offer is placed. This means you must already have the funds in an account in your name, or company name if buying in a company name. A copy of the bank statement is required to place the offer. If you do your banking online, and are able to print an official looking statement, with your name and professional looking bank identification on it, this may be acceptable. If it looks like just a "screen print", and looks like it could have been faked, it will probably not be accepted by the local banks.
A letter of credit, or bank line of credit, is not acceptable. If that is going to be your source, you will need to draw the amount in advance and deposit it in an account in your name and obtain a statement.
11. How much deposit do I need and when?
We normally write the offer with the deposit to be paid "On Acceptance". This means when the offer is accepted, you will only have 24-48 hours to deliver the deposit to the bank in certified funds. The only 2 acceptable methods are a direct wire, or in some circumstances a cashiers check is acceptable. It always must be in US funds. Some buyers prefer to place the deposit in advance with a local title company. This way if your offer is accepted, the local title company will wire or overnight the deposit to the seller's closing agent for you.
For most purchases we will offer $1000 - $2000. It is common for banks to require up to 10% deposit for cash offers. If they require above the $2000 offered on acceptance, they will normally allow up to 3 days to provide the additional amount.
12. How do I transfer the money to complete the purchase?
I have arranged with a worldwide currency exchange company to help my clients move the money from Canada to the closing agent at time of closing. They can save you hundreds or thousands of dollars. They will transfer the funds at a time when the exchange rates are most in your favor. Please contact me and I will put you in touch with the proper person to help you. If you have your bank move the money for you, they will do it when most opportune to them. The exchange company I use will hold the money in advance of closing, and move it to the US when the rates are best for you. They will then wire it to the closing agent 1-2 days before closing.
13. Tell me about Rental Income and US Taxes:
The Canada-U.S. tax treaty no longer provides overriding provisions applicable to real estate rental income, thus both country’s domestic tax laws apply unmodified.
Under U.S. domestic tax law, rental income derived from U.S. real estate is subject to a 30% withholding tax imposed on gross rents unreduced by expenses or losses. However, U.S. law allows the foreign investor the option of filing U.S. tax returns and electing “net basis” taxation and graduated tax rates under the regular or alternative minimum tax rules (a net rental loss may not reduce other income). Once the election is made, it can only be changed with IRS consent and the election applies to all of the investor’s U.S. rental activities.
Under Canadian domestic tax law, U.S. rental income is included in a Canadian resident’s taxable income on a net basis (a net rental loss is allowed to reduce other taxable income, except to the extent the loss is attributable to depreciation or “capital cost allowances”). The investor must also take into account gains and losses resulting from currency fluctuations. Any U.S. taxes paid may be credited against Canadian tax attributable to the net U.S. income (amounts not credited may be deducted from taxable income).
For more information relating to taxes, please consult the attorney I recommend above.
