The Best Way for Canadians to Buy and Own U.S. Real Estate

This year I’ve helped dozens of Canadians invest in the U.S. real estate market.

One of the things that ALWAYS comes up is; how to structure the investment for maximum tax-efficiency and liability protection.

While most investors will set up a Limited Liability Company (LLC) in the U.S., this is often a very poor choice, and can result in double taxation for Canadian buyers.

To set the record straight, I paid a qualified cross-border tax attorney to give me a definitive answer to the question; how should Canadian residents structrue their U.S. real estate investment for maximum tax-efficiency and liability protection.

Here’s exactly what he had to say…

Good day, here is the answer to your query specific to Canadian investors buying U.S. situs real estate for the purposes of long-term rental. This information relates to a property based in the state of Missouri, although can be extrapolated to other U.S. states.

If you purchase a long-term rental property in the United States and chooses to treat the rental activity as effectively connected income, your objective is usually to balance four issues:

• U.S. federal taxation.
• Exposure to double taxation in Canada.
• Estate tax exposure in the United States.
• Practical concerns like banking, liability protection, and long-term administration.

The Canada–U.S. tax treaty applies, and you have several entity choices, but only one or two tend to make sense once you look at the combined tax treatment on both sides of the border.

Direct Ownership – Personal Name

Holding the U.S. property in your personal name is the simplest option, but it is rarely the most efficient. Direct ownership avoids entity-level tax and provides full treaty benefits, but it exposes you to landlord liability, provides no privacy, and places the real estate fully inside your U.S. taxable estate.

For Canadian residents, this makes your estate vulnerable to U.S. estate tax thresholds even when your worldwide estate exceeds US exemption levels.

Direct ownership also causes administrative friction because Canada will treat the income as passive foreign rental income, offset by foreign tax credits, but offers no additional structural planning benefits.

U.S. Limited Liability Company (LLC)

A U.S. limited liability company is a common for domestic U.S. planning, but it usually creates poor cross-border results for Canadians, since Canada does not treat an LLC as a disregarded entity; it treats it as a corporation.

That mismatched classification means the United States taxes you as an individual owner while Canada taxes you as if you are receiving corporate dividends. The result is structural double taxation, even when you elect ECI, because the foreign tax credits generally cannot match the characterization differences. You can sometimes mitigate this through specialized elections or advance rulings, but it is typically not worth the complexity for a single rental property.

Canadian Corporation

A Canadian corporation holding U.S. real estate is also generally unfavorable because the United States will treat the corporation as engaged in a rental business and impose corporate-level tax, while Canada may tax the retained earnings and distributions in a way that creates additional layers of tax. Moreover, using a corporation in either country generally triggers higher long-term capital gains tax when the property is sold, because corporate capital gains do not receive the same favorable rates that individuals receive under U.S. rules.

In cross-border real estate, corporate ownership usually becomes the most expensive structure unless significant liability insulation is required for commercial operations.

The Best Option for All-Cash Purchases – Canadian Investors

The structure that tends to produce the best integrated outcome for Canadians purchasing U.S. rental property with cash is a U.S. limited partnership or a U.S. limited liability limited partnership.

The usual pattern is that the Canadian investor owns an interest through a Canadian corporation as the limited partner, while a small U.S. LLC acts as the general partner solely for liability protection. However, this option may create challenges when financing your U.S. property purchase (see more later).

This structure avoids entity-level tax in the United States, ensures flow-through treatment, prevents the Canada–U.S. classification mismatch that occurs with LLCs, and minimizes the risk of double taxation in Canada because Canada respects partnership flow-through.

It also reduces U.S. estate tax exposure because the partnership interest is generally considered intangible property, which may be treated more favorably under the treaty.

At the same time, most U.S. states recognize limited partnerships and offers predictable liability protection when structured properly.

You can refine the structure by ensuring that elections are made in the partnership agreement to treat the rental activity as effectively connected income, which allows standard deductions, depreciation, and expense treatment.

Canada then taxes your share of the net rental income from the partnership as foreign income, allowing you to use foreign tax credits without the mismatch created by an LLC.

When the property is sold, capital gains flow through the partnership, allowing both countries to tax according to their own rules, but still providing full credit mechanisms under the treaty to avoid double taxation.

For most Canadians investing in a single rental property, a U.S. limited partnership with a Canadian corporation as the LP and a small U.S. LLC as the GP offers the best blend of tax efficiency, liability protection, and estate planning advantages.

If the investment expands into multiple properties, or if you anticipate a future exit strategy involving sales, 1031 exchanges, or refinancing, the same structure scales without creating new tax mismatches.

If the property is only intended as a temporary investment, or if you prefer the lowest-complexity structure, direct ownership with careful estate tax planning may be manageable, but it does not offer the long-term protection or tax symmetry of a cross-border partnership model.

Best Option for Financed Purchases – Canadians

Most Canadians buying U.S. rental property with financing will use a foreign national DSCR loan.

When a Canadian investor cannot insert a Canadian corporation into the limited partnership because of lender restrictions, the next most practical variation is for the Canadian individual to be the limited partner while the U.S. LLC remains the general partner.

This still preserves most of the tax advantages of the LP structure and avoids the Canada–U.S. classification mismatch that occurs with direct LLC ownership. However, shifting the limited partner interest from a Canadian corporation to the individual affects three key areas:

• Canadian tax timing.
• U.S. estate tax exposure.
• Long-term liability and privacy considerations.

From an income-tax standpoint, Canada is generally comfortable with partnerships. If you hold the LP interest personally, Canada treats the rental income as foreign property income subject to foreign tax credits.

Because the U.S. will tax the partnership’s effectively connected income at individual rates, the credits usually align well and avoid double taxation.

You still avoid the hybrid tax mismatch that happens with LLCs. The main practical change is that the income flows directly to you personally rather than through a Canadian corporate layer, so there is no possibility of corporate deferral or income smoothing; however, most individual investors do not rely on those features anyway.

For annual cross-border filings, the compliance burden remains the same, since the LP issues you a Schedule K-1 and you file a U.S. 1040-NR with the ECI election.

The most significant drawback of holding the LP interest personally is U.S. estate tax exposure. The LP interest is intangible property, and the treaty provides relief, but the analysis becomes more sensitive when the owner is an individual rather than a corporation. Under the treaty, intangible partnership interests owned by Canadian residents are generally not subject to U.S. estate tax unless the partnership is considered to hold U.S. situs assets in a way that attributes ownership to the partner. A properly drafted LP agreement can greatly reduce this risk.

When a Canadian corporation owns the LP interest, the corporation itself is the partner, which adds a corporate layer between you and the U.S. asset; without that layer, the analysis focuses directly on your personal estate. In practice, many Canadians still achieve effective treaty protection as individual LPs, but you need to ensure the partnership is structured so that the interest is clearly an intangible and not merely a pass-through holding of U.S. real property.

Liability protection also shifts slightly when you hold the LP interest personally. The LP structure protects limited partners from operational liability so long as they do not materially participate in management. The U.S. LLC as GP absorbs the operational risk.

This setup is still much safer than owning the property directly, because the LP form keeps you insulated as long as the partnership formalities are respected. However, the privacy advantage is not as strong as when a Canadian corporation is the limited partner, since a Canadian corporation can add an additional layer between your name and the public filings. In the U.S., LP ownership is not always listed publicly, but lenders, insurance carriers, and some local agencies may still request personal documentation that they might not require if the LP interest were held through a corporation.

In reality, the financing constraints described are common. U.S. lenders who specialize in foreign national mortgage programs often insist on an LP–LLC structure where the NRA is named personally as the LP, because they want an identifiable borrower on the pass-through side and they have underwriting guidelines that prohibit foreign corporate ownership. If you need the financing, using yourself as the LP is both acceptable and common.

Additional Estate Tax Planning Considerations for Canadians

The main tax advantage you give up is the corporate buffer for estate planning, but this can often be substituted later with trust planning, cross-border estate structuring, or a later interposition of a Canadian entity after the loan is seasoned or refinanced.

If your goal is to secure financing now while keeping the long-term tax and estate benefits, the practical approach many Canadians use is to purchase the property using the lender-friendly LP structure with the individual as the limited partner, then revisit the ownership structure once the loan allows for entity restructuring.

Some lenders permit substitution of partners after a seasoning period.

Others allow a drop-down of the LP interest into a Canadian corporation or trust after closing, provided that the borrowing entity remains unchanged.

Even if the structure stays permanently as an individual LP, most Canadians still receive strong protection under the treaty, and the partnership format avoids the double-tax problems that arise with LLC ownership.

If you let the Canadian individual be the limited partner is not inherently disadvantageous from a tax perspective and is often perfectly workable.

The primary trade-off is increased U.S. estate tax sensitivity, which can be addressed with careful drafting or later planning. From a practical standpoint, this version of the LP–LLC structure is often the only one lenders will approve, and it still delivers most of the benefits of the recommended approach without triggering the cross-border tax mismatches that occur with direct LLC ownership or with corporate entities that U.S. lenders refuse to underwrite.

I hope you find that useful.

So, there you have it… The best way for Canadians to invest in U.S. real estate depends on whether you’re paying cash, or intend to use financing.

For cash buyers, the best options is usually a U.S. Limited Partnership (with a U.S. LLC as General Partner), and a Canadian Corporation holding the intierest in the LP.

For those of us using financing (most of us), the same LP structure in the U.S., holding the LP interest in our personal name is a perfect fit.

I hope that helps to clear up a lot of the misinformation and noise around the subject.

If you’d like help planning and sourcing your U.S. real estate investment, book a call with me or my team using the scheduler below.