For many Canadians, a Florida condo, an Arizona winter home, or a U.S. rental property is an attractive investment. What looks like a simple real estate purchase, however, sits at the intersection of two tax systems that do not always agree with each other. The way you take title — personally, through a limited liability company (LLC), a Canadian corporation, a partnership, or a cross-border trust — drives your exposure to U.S. income tax, U.S. estate tax, withholding on sale, and the risk of genuine double taxation back home in Canada. The right structure depends on price, use (personal vs. rental), how many owners are involved, your net worth, and your time horizon. The wrong structure can quietly create tax that no foreign tax credit will fully relieve.
This guide walks through the ownership options, the U.S. estate-tax problem that surprises most Canadian buyers, the FIRPTA withholding mechanics on a future sale, and how rental income is reported. It closes with a decision framework and a worked example.
The four tax exposures to plan around
Before choosing a structure, it helps to name the four distinct exposures a Canadian owner faces. Each ownership option trades them off differently:
- U.S. income tax on rental profit — reported on a Form 1040-NR, ideally on a net basis (see below).
- U.S. tax on the gain when you sell — collected up front through FIRPTA withholding and trued up on a U.S. return.
- U.S. federal estate tax on death — imposed on the value of U.S.-situs assets, with only partial treaty relief.
- Canadian tax and double-tax risk — Canada taxes residents on worldwide income and gains, and grants foreign tax credits only where the foreign tax matches the Canadian tax in nature and timing.
U.S. real estate is, by definition, U.S.-situs property. So the estate-tax exposure cannot be wished away — it can only be managed through how title is held.
Ownership-structure options
Personal (direct individual) ownership
The simplest approach is to buy the property in your own name (or jointly with a spouse). It is administratively easy, qualifies for personal-use treatment, and keeps the structure transparent for both countries — there is no entity-classification mismatch to worry about. Rental income is reported on a 1040-NR; on sale, FIRPTA withholding applies and the gain is reported on a U.S. return and again in Canada with a foreign tax credit for the U.S. tax.
The drawback is full personal exposure to U.S. estate tax. On death, the property's fair market value is included in your U.S. gross estate. There is no liability protection from tenants or guests, and probate in the U.S. state where the property sits may be required. For a modest, fully-personal-use property held by a person whose worldwide estate is well within treaty limits, direct ownership is often still the cleanest answer.
U.S. LLC — and the CRA hybrid-mismatch double-tax trap
U.S. advisors frequently recommend an LLC for liability protection. For a Canadian, a single-member or multi-member LLC is usually the most dangerous structure of all, because of an entity-classification mismatch.
By default, the IRS treats an LLC as a flow-through (a disregarded entity or partnership) — the income passes through to the owner and is taxed in the owner's hands. The Canada Revenue Agency, by contrast, treats a U.S. LLC as a corporation. This is a classic hybrid mismatch. The consequences:
- The U.S. taxes the Canadian owner on the LLC's income (and gains) as it is earned, at individual rates.
- Canada does not see income until the LLC actually distributes cash, which Canada characterizes as a foreign dividend.
- Because the U.S. tax was levied on the individual on business/rental income, while Canada is taxing a dividend — a different taxpayer characterization in a potentially different year — the foreign tax credit often does not line up. The CRA may deny or limit the credit.
The result can be income taxed once in the U.S. and again in Canada with little relief, producing effective rates that can climb well beyond what either country imposes on its own. The Canada-U.S. treaty's LLC look-through provisions help in some fact patterns but do not reliably cure the personal-level mismatch on real estate. For Canadian buyers, an LLC is generally a structure to avoid, or to unwind, unless a cross-border advisor has confirmed the credits actually work on your facts.
Canadian corporation
Holding U.S. real estate through a Canadian corporation removes the property from your personal U.S. estate (a corporation does not die), and Canada recognizes the corporation cleanly. But it introduces its own costs. Personal use of corporate-owned real estate can trigger a Canadian shareholder-benefit assessment under subsection 15(1) of the Income Tax Act — the CRA can assess a taxable benefit for the rent-free use of company property. For a vacation home you use yourself, this is a serious problem. A Canadian corporation also does not access the favourable U.S. long-term capital gains rates available to individuals, and U.S. branch-profits and filing obligations can arise. This option fits investment/rental holdings better than personal-use homes, and usually for higher-value portfolios.
Partnership (including a limited partnership)
A properly structured limited partnership can combine some liability protection with flow-through treatment that both countries are more likely to respect than an LLC, and can help fracture ownership for estate-tax purposes. Partnerships add filing complexity (a U.S. partnership return plus partner-level 1040-NRs) and require careful drafting so the partnership interest — rather than the underlying U.S. realty — is what each partner owns. The U.S.-situs analysis for estate tax on a partnership interest is fact-specific and should be confirmed in advance.
Cross-border (irrevocable) trust
For higher-net-worth families, a purpose-built cross-border trust can hold the property so that it is not included in any individual's U.S. gross estate, while still allowing family use. The trust must be drafted to satisfy both U.S. estate-tax rules and Canadian rules — including the 21-year deemed-disposition rule that applies to most Canadian trusts and the attribution rules. This is the most robust estate-tax answer but the most expensive to set up and administer, and it only makes sense above a meaningful value threshold. It overlaps with broader family trust planning.
U.S. estate tax: the exposure Canadians underestimate
A non-resident, non-citizen of the U.S. (an "NRA") is subject to U.S. federal estate tax on the value of U.S.-situs assets — and U.S. real estate is squarely U.S.-situs. The shock for most Canadians is the exemption gap. A U.S. citizen or domiciliary has a basic exclusion of USD $15 million for 2026. An NRA, under domestic U.S. law, gets a unified credit that shelters only the first USD $60,000 of U.S.-situs value. Above that, rates climb to 40%.
The relief comes from the Canada-U.S. tax treaty (Article XXIX B). It lets a Canadian decedent claim a prorated share of the full U.S. unified credit instead of the tiny $60,000 amount. The proration formula is:
- Prorated unified credit = full U.S. unified credit × (U.S.-situs assets ÷ worldwide estate)
So the more of your total wealth that sits in U.S. assets, the larger your shelter — but a Canadian with a large worldwide estate and a single U.S. property gets only a thin slice of the credit. The treaty also allows U.S. estate tax actually paid to be claimed as a foreign tax credit against Canadian tax arising on the deemed disposition at death, reducing double taxation. Planning here interacts with Canadian post-mortem and estate strategy, and dedicated U.S. estate tax for Canadians analysis is usually warranted once U.S. holdings are significant.
Selling: FIRPTA withholding and the s.116 parallel
When an NRA sells U.S. real estate, the Foreign Investment in Real Property Tax Act (FIRPTA) requires the buyer to withhold and remit a percentage of the gross sale price — not the gain — to the IRS. The standard rate is 15% of gross proceeds. Reduced rates apply where the buyer intends to use the property as a residence: 0% if the price is USD $300,000 or less, and 10% if the price is over $300,000 but not more than $1,000,000.
Canadians will recognize the logic: it mirrors the section 116 clearance-certificate system Canada imposes on non-residents selling Canadian property, where a purchaser must withhold unless a certificate is obtained. Under FIRPTA, the seller can apply (Form 8288-B) for a withholding certificate to reduce the amount withheld to the actual expected tax on the gain — important when 15% of the gross price far exceeds the real tax. The withheld amount is a deposit: the seller files a 1040-NR for the year of sale, computes the actual capital gains tax, and claims a refund of the excess. The same gain is reported in Canada (at the 50% inclusion rate currently in force in 2026 — the proposed increase to a two-thirds inclusion rate was cancelled and never became law), with a foreign tax credit for the U.S. tax. Our FIRPTA service for Canadian sellers handles the certificate application and the cross-border return coordination.
Renting: 1040-NR and the s.871(d) net election
If you rent the property, the default U.S. rule is harsh: U.S.-source rent paid to an NRA is subject to a flat 30% withholding tax on gross rent — no deductions for mortgage interest, property tax, insurance, management fees, or depreciation. Almost no Canadian owner should accept that result.
The fix is the election under Internal Revenue Code section 871(d). By attaching a statement to a Form 1040-NR, the owner elects to treat the U.S. real-property income as effectively connected with a U.S. trade or business. The rent is then taxed on a net basis at graduated rates — after deducting operating expenses and depreciation — which is almost always far better than 30% of gross. The election generally continues for future years once made. The flip side: depreciation claimed reduces basis and increases the gain (and recapture) on a later sale, which then runs through the FIRPTA machinery above, so the rental and exit positions should be modelled together.
State taxes — do not forget the second layer
U.S. tax is not just federal. States tax rental income and gains differently: Florida has no personal income tax (a reason snowbird properties cluster there), while California taxes rental income and gains at high rates and has its own withholding on sales by non-residents. Some states impose their own estate or inheritance tax with far lower exemptions than the federal system. Property-tax regimes, homestead rules, and transfer taxes also vary. The state where the property sits can change the structuring answer entirely.
A decision framework
Work through these steps before signing:
- Step 1 — Define the use. Personal-use only, rental only, or mixed? Personal use makes corporate ownership dangerous (subsection 15(1) benefit) and favours direct or trust ownership.
- Step 2 — Price the U.S. estate exposure. Estimate worldwide estate and the U.S.-situs share, then run the treaty proration. If the prorated credit covers the property comfortably, direct ownership may be fine.
- Step 3 — Count the owners and the value. Low value, single use, modest estate → direct ownership. Higher value, multiple owners, larger estate → partnership or cross-border trust.
- Step 4 — Stress-test the credits. For any entity, confirm the U.S. tax actually generates a usable Canadian foreign tax credit. This is where LLCs fail.
- Step 5 — Model the exit and death together. Project FIRPTA withholding, the net gain, depreciation recapture, and the estate-tax position under each structure — not just the year-one purchase.
- Step 6 — Layer in the state. Confirm state income, withholding, and death-tax rules for the specific location.
Worked example
Assume a Canadian couple buys a USD $700,000 vacation condo in Florida, used personally and never rented. Their worldwide estate is USD $3.5 million.
- If one spouse dies owning it directly: the U.S. gross estate includes the $700,000 (their share). Under domestic law the NRA shelter would be only $60,000. Using the treaty proration with a 2026 full unified credit shielding $15 million of value: the prorated credit equals roughly $15,000,000 × ($700,000 ÷ $3,500,000) = the credit attributable to about $3,000,000 of value — comfortably more than the $700,000 condo. Result: likely no U.S. estate tax, because the prorated treaty credit exceeds the U.S.-situs value. Direct ownership works here.
- Now change the facts: a $3,000,000 Manhattan apartment held by a person with a $40,000,000 worldwide estate. Prorated credit = $15,000,000 × ($3,000,000 ÷ $40,000,000) = credit attributable to about $1,125,000 of value. The remaining roughly $1,875,000 of the apartment's value is exposed to U.S. estate tax at rates up to 40% — potentially several hundred thousand dollars. Here, a cross-border trust or partnership structure that keeps the realty out of the individual's U.S. estate can be worth far more than its setup cost.
The lesson: the same asset produces opposite answers depending on the size of the worldwide estate, because the treaty credit is prorated, not fixed.
How Barrett Tax Law approaches cross-border U.S. real estate
We start by mapping all four exposures — rental income, exit gain, U.S. estate tax, and Canadian double-tax risk — against your specific facts: price, use, ownership, net worth, and the state involved. From there we model each viable structure side by side, confirm that foreign tax credits actually function (the step that catches LLC owners), prepare or coordinate the 1040-NR and section 871(d) election for rentals, and manage FIRPTA withholding certificates and refunds on a sale. Where U.S. estate exposure is material, we integrate the U.S. structure with your Canadian estate plan so the two systems work together rather than against each other. Our cross-border real estate practice handles both the structuring at purchase and the cleanup of structures (such as LLCs) that were set up without Canadian advice.
If you are buying, holding, renting, or selling U.S. property — or you already own through an LLC and want to know your exposure — contact us for a free, confidential consultation to review your situation before the next tax or filing event.
Frequently asked questions
Why is owning U.S. real estate through an LLC a problem for Canadians?
The trouble is an entity-classification mismatch. The IRS usually treats an LLC as flow-through, taxing the income in the Canadian owner's hands as it is earned. The Canada Revenue Agency instead treats the LLC as a corporation, and recognizes income only when the LLC distributes cash, which it characterizes as a foreign dividend. Because the U.S. taxed the individual on rental or business income while Canada taxes a dividend, often in a different year, the Canadian foreign tax credit frequently does not line up. The CRA may deny or limit the credit, leaving the same income taxed in both countries with little relief and an effective rate that can climb well beyond either country's own marginal rate. Most Canadians should avoid an LLC for U.S. real estate, or have a cross-border advisor confirm the credits actually work, and consider unwinding an existing one.
How much U.S. estate tax will I owe on my U.S. property when I die?
U.S. real estate is U.S.-situs property, so its fair market value is included in your U.S. gross estate even though you are not a U.S. citizen or resident. Under plain U.S. law a non-resident gets a unified credit sheltering only the first USD $60,000 of value, with rates up to 40% above that. The Canada-U.S. treaty improves this dramatically: you can claim a prorated share of the full U.S. unified credit, which shelters up to USD $15 million of value for a U.S. person in 2026. The prorated amount equals that full credit multiplied by your U.S.-situs assets divided by your worldwide estate. So a modest U.S. property held by someone with a modest worldwide estate may face no U.S. estate tax, while the same property held by a very wealthy person can be substantially exposed.
What is FIRPTA withholding and how do I get the money back?
FIRPTA requires the buyer of U.S. real estate from a foreign seller to withhold and remit tax to the IRS based on the gross sale price, not the profit. The standard rate is 15% of gross proceeds. It drops to 0% if the buyer will use the property as a residence and the price is USD $300,000 or less, and to 10% where the buyer-as-residence price is over $300,000 but not more than $1,000,000. The withholding is only a deposit. If it exceeds your actual capital gains tax, you can either apply in advance for a withholding certificate (Form 8288-B) to reduce what is withheld, or file a U.S. non-resident return (1040-NR) after the sale to compute the real tax and claim a refund of the excess. The system parallels Canada's own section 116 clearance-certificate regime for non-residents selling Canadian property.
How is rental income from my U.S. property taxed?
By default, U.S.-source rent paid to a non-resident is hit with a flat 30% withholding tax on the gross rent, with no deductions for mortgage interest, property tax, insurance, management, or depreciation. That is a punishing result. The fix is the election under Internal Revenue Code section 871(d): by attaching a statement to a Form 1040-NR, you elect to treat the rental income as effectively connected with a U.S. trade or business. The rent is then taxed on a net basis at graduated rates, after deducting operating expenses and depreciation, which is almost always far better than 30% of gross. The election generally continues automatically in later years. Keep in mind that depreciation you claim reduces your cost basis and increases the taxable gain and recapture when you eventually sell, so the rental and sale positions should be planned together.
Is the Canadian capital gains inclusion rate on a U.S. property sale 50% or two-thirds?
It is 50% in 2026. The federal government proposed raising the inclusion rate to two-thirds (66.7%) on gains above $250,000 for individuals and on all corporate and most trust gains, effective for dispositions after June 25, 2024. That measure was first deferred and then cancelled in 2025; it was never enacted into law. So for 2026, Canadians report capital gains, including the gain on a U.S. property sale, at the long-standing one-half inclusion rate. When you sell U.S. real estate, the gain is taxable in both countries: the U.S. through FIRPTA and your 1040-NR, and Canada on your resident return. You then claim a foreign tax credit in Canada for the U.S. tax paid on the same gain to relieve double taxation, subject to the usual matching and limitation rules.
Which ownership structure suits a Canadian buying a U.S. vacation home?
There is no single right answer; it depends on the property's price, whether you will rent it, how many owners are involved, your worldwide net worth, and the state. For a modest, personal-use-only home owned by someone whose worldwide estate keeps the treaty-prorated U.S. estate credit comfortably above the property's value, direct personal ownership is often the cleanest choice and avoids entity mismatches. A Canadian corporation is risky for personal use because the CRA can assess a shareholder benefit under subsection 15(1) for rent-free use of company property. Higher-value holdings, multiple owners, or a large worldwide estate may justify a partnership or a purpose-built cross-border trust to keep the realty out of your U.S. estate. An LLC is generally the structure to avoid. The decision should be modelled before purchase, accounting for the eventual sale and death, not just year one.