Tax Ramifications for purchasing/selling property in the US, without rentals

David Ingram wrote:

QUESTION:

Hello,

I am currently in the process of completing on the purchase of two homes in the US and I am a Canadian citizen. The homes are being purchased with on a Fee simple basis with a clear title and warranty deed.
As a Canadian individual, I will sell this property to a US resident. I was advised a US ID Number is not required, but want to know what the tax ramifications would be. 
Income tax percentage, is that payable in US & Canada under the ITA and to IRS?
Is this done through a W7 form there? What the cost would be to have you take care of this.

Your prompt attention is greatly appreciated,

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david ingram replies:

I am doing a seminar on this for Ozzie jurock tomorrow.

a US ID number is required on the sale but not the purchase.  Opening up an account at a US bank and filling out form W-7 will likely get you the number.  Otherwise, you will need to get it when you do the tax return to report the sale of the real estate. 

You are flipping and the sale is taxable at full rates in Canada.  the US will also tax you at full rates because it will be a short term capital gain. You will get credit for the tax paid to the US state and federal governments by filling in forms T2209 and T2036 on your Canadian return.

Your tax rate will ultimately be your marginal tax rate in Canada which runs from a low of 22% on less than $36,000 or so to a high of about 48% over $122,000 depending upon the province or territory you live in and how much you are reporting as profit.


The following is a handout at tomorrow's (now today's) seminar.

David Ingram's US/Canada Services
US/Canada/Mexico Tax Immigration & working Visa Specialists
US / Canada Real Estate Specialists
4466 Prospect Road
North Vancouver,  BC, CANADA, V7N 3L7
Calls accepted from 10 AM to 10 PM 7 days a week
Res (604) 980-3578 Cell (604) 657-8451
Bus (604) 980-0321 Fax (604) 980-0325
[email protected]
www.centa.com www.david-ingram.com

 

Feb 16, 2008.

 

Canadians with Rentals in the USA. – Potential Problems with Immigration

 

QUESTION that came to me from ASK AN EXPERT at www.jurock.com

 
We just purchased property in Spokane Washington (a 4-plex apartment).
We plan on renting out 3 of the units and keeping one.  I was told by the border crossing inspector, that I have to hire a rental agency in order to rent out the apartments and I also  have to have a property manger full time..
We will be at our apartment approx 2 times a month so we do not need a property manager.
Do you know if this true, or please direct me to the correct person that would be able to help me.
Thanks for your time.
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david ingram replies:

You need a property manager if you do not want the strong possibility of going to jail for a few days before being deported and then not allowed back in the USA. For a story about US Immigrations hell for a Holiday Inn Manager, try
http://apostille.us/news/local_holiday_inn_express_manager_in_jail_on_immigration_charges;_husband_fights_for_her_return.shtml
or how about a married woman's ordeal in Georgia for a traffic violation  at
http://www.canada.com/ottawacitizen/news/story.html?id=f4f1d2fb-07ae-4560-8f6c-703acf8146fb&k=0

Crossing the border when you have an ad running to show the premises and saying you are going down to spend the weekend in your holiday home (i.e. lying to the HOMELAND Security official) could result in seizure of your vehicle and a ban for up to 10 years under their ER (Expedited Removal) process.  In other words, it is more serious to lie to the guard at the border than it is to do the work.

You 'could' actually show the property for rent,  but you can NOT write out a contract for rent or collect a single rent cheque (check) or cash for rent in the United States. There is nothing new about this.  The first time I ran into it was in 1972 or 1973.

If you are physically there, you can NOT cut the grass, shovel the sidewalk, paint or decorate or repair or fix or remodel or improve or take out the garbage for any part of the rental property.

You can paint and clean your own unit if it is NEVER rented or intended to be rented. You can not paint and clean up getting the property ready for rent so DO NOT make the mistake of thinking you can live in one, clean it up and remodel it and then rent it out and do the same for another one and then another one and another one. If you do this and one of your tenants (who maybe doesn't like you because you evicted them or told them to turn their stereo down when you happen to be in town or for any other reason) read my website, (or the www.uscis.gov website) he or she would find out that you can NOT do this stuff and could phone the Homeland Security office or write an anonymous letter and you could be arrested in November 2008 for something you did in December 2007. 

This may seem unreal, but in US terms, working without a visa is just as serious in law as the spontaneous robbing of a convenience store and the penalties can be worse.  Think of those nightly news shows with 28 illegal Mexican or Guatemalan citizens being stuffed into Paddy wagons on the Arizona border. This is not a racist comment but with the Mexican illegal immigrants, being rounded up and shipped back across the border is a way of life with no social stigma.  For a nice clean living Canadian, being thrown into an immigration detention cell for taking money for rent is a devastating experience. In one case, a mother and her son were thrown into jail for 5 days in Phoenix when she went to Phoenix from White Rock BC.  Her husband owned 18 units and HAD a property manager.  Unfortunately, he also died in the arms of that female property manager and his widow then fired the property manager and she and her 20 year old son went to Phoenix to collect the rent and hire another property manager.

The property manager (who knew the law as everyone in Arizona does) phoned Homeland Security who showed up and arrested mother and son and threw them into the notorious Phoenix Immigration hell with some 300 other illegals. To rub salt into the widow's wounds, the property manager ended up with the property because she was a second mortgage holder on the property and the property fell into default because of the widow's cash flow troubles, largely because she could not go to Phoenix to hire another property manager.

For instance, for 'you', this kind of arrest could result in imprisonment for a usual five days in a US immigration jail until you posted $5,000 bail each and then being banished from the US for five to ten years. 

It does not stop there.  This type of conviction would stop you getting on an airplane which stopped in the USA on the way to Mexico.  AND,  under new US laws that have been proposed but not yet actually put in place, the arrest and banning would stop your Nov 6 trip to Cancun because people in this position will not even be allowed on commercial airliners that are flying over any part of the US. To get to Cancun, you would have to fly from Calgary or Vancouver to London England and then back to Mexico City and 'then' to Cancun and reverse it to get home.

This may be overkill but 'You' are / were lucky that the inspector gave you the correct advice BEFORE you put your foot in it.

By the way, for income tax You ALSO HAVE TO FILE A 1040NR US TAX RETURN WITH A SCHEDULE E AND A SCHEDULE 4562  EACH.  Then the same income gets put on Schedule T776 of your Canadian return.  If you have paid tax to the US, you will claim it as a credit on Canadian forms T2209 and T2036. 43 States also have a state return which you will both have to prepare.

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The price for our services as described would likely be in the $1,200 to $2,000 range.