Canadians buying US real estate- how to reduce the risk of being sued!

Back in 2014, we decided to buy our first US rental property. It was a single-family home located in suburban Phoenix, Arizona, in a community called Avondale. The market at the time was far from the bottom, which it reached in maybe around 2010, but it sure wasn’t even close to what it is today.

How to properly insure for owning a US rental property

Everyone knows that the US is a country built on lawsuits, and I needed to ensure that we limited our risk to this possibility. As you know, in the world of real estate investing and managing tenants, anything can happen! In this article I am going to speak to you what we have done to limit our risk of being sued.

Like most Canadians buying down in the USA, we were told by everyone: lawyers, realtors, property managers, etc. to form an LLC. This would then limit our liability and exposure to being sued.

Do NOT buy your US rental property in an LLC

Well, that works perfectly well for Americans, but if you’re Canadian, do NOT do this before speaking with a tax accountant who is well versed on both sides of the border. Holding your investment property in an LLC opens you up to double taxation, whereby you will be taxed from the IRS on your rental income, as well as CRA. Not fun having to pay tax twice, right!

As a result of not wanting to be taxed twice, I decided to hold the property in my personal name, which exposes me to extra risk. In order to deal with the extra exposure, I then took out an “umbrella policy” on top of my rental property insurance, which can give me up to $5m in liability insurance.

Foolproof? No, but sure a hell of a lot better than only $500,000 in liability which most insurance policies have. So for an extra $400/ year, I can sleep at night. Be sure to ask your insurance provider for this “umbrella” when purchasing a rental property in the US.

Stay tuned for our next article in the series to find out how we financed this purchase, and what the results have been since 2014.

If you’re looking for some real estate market advice, please reach out to our property management and real estate office here.

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