Originally written by John Riche on February 06, 2009
There are many misconceptions by Canadians about buying investment properties in America. This is due to both the type of taxation and geographic challenges inherent in this process.
Of the most popular misconceptions is that of the automatic 30% withholding tax on all rents (income) that the IRS states is a mandatory flat tax. This usually means the property manager collects it for them. However, the IRS actually allows the foreign investor to file a US tax return in lieu of this 30%, and then allows the investor to write of those expenses normally incurred in the running of the investment property (i.e. maintenance, property management fees, insurance, etc…) against the income generated by the property. The investor will have to fill out an IRS Form 4224 (Exemption from Withholding Tax on Income Effectively Connected with the Conduct of a Trade or Business in the U.S.) in advance, or have their accountant do it for them. This also allows Canadians to report the "net" income on their foreign property (Form T1135) on their Canadian tax return.
On that note, the investor must have an accountant who is at least familiar with US taxation if he or she was jumping into the American housing market.
Another misconception is that Canadians may think they are "going it alone" when buying a home in the US and that they can't use the services of a local realtor. Many agents have investigated this new income stream (via the referral) and have made partnerships with other Realtors in the US. A little homework may be required, but an agent with pre-existing relationships is a huge advantage.
Despite these misconceptions Canadians in 2008 were still the top foreign purchasers of residential properties in the US. According to The 2008 NAR Profile of International Home Buying Activity, Canadians accounted for 23.6 of all international buyers. This was certainly helped by a favorable exchange rate on the US Greenback (for a very short period the Canadian Dollar was even a tad higher than the Greenback). And 63% of Canadians self-financed these properties, paying outright cash.
Indeed this pattern also holds true for other southern states such as Arizona, Nevada, California and Texas. Canadians love the warm climate… if you have ever visited the great white north in the winter I think you would see why.