converted property US versus Canada -

I spoke to 113 Canadian residents at Ozzie Jurock's REAG Seminar (www.jurock.com) about investing in US Real Estate last night and although I gave them a sample US asset entry worksheet and a completed US 4562 Depreciation schedule as an example, I did not even think about the differences in setting up depreciation for a building that was being converted from personal to business use. 

Then, this morning (Jan 8, 2008), Kerry Kerstetter had a definitive answer.  To Make a point, the situation is reversed in Canada.  In Canada, the rule is that CCA (Capital Cost Allowance) is set up at the Fair Market Value the day of conversion. If you paid $100,000 and it is worth $300,000 the date you convert it, you would use $300,000 for the start of depreciation.  In the USA, you would use $100,000. In addition, in Canada you can NOT use depreciation to create or increase a loss.  In the USA, you MUST use depreciation.

The following in red is from http://www.taxguru.net/2008/01/depreciating-converted-property.html  For those interested in US tax answers, you can not do better than subscribe to Kerry's newsletter.  You can find the subscription spot about 8 inches down on the right hand side at http://www.taxguru.net

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Subject: Depreciation Question

Hi Guru, Have been reading you for a long time but never have seen a question like this.  From 1999 to 2006, I ran a B&B and depreciated the business portion of my property as a commercial business.  On Jan 1, 2007, I converted this property to a single family rental.  Do I use the residential depreciation schedule this year?  Also, would I continue to use the old basis or create a new basis when the property was converted.  The property has appreciated almost double in value from 1999 to 2006.

 

Thanks for your advice and hopefully this might be helpful to some other loyal readers

Thanks

A:

If you have been reading my stuff for any length of time, you should know that you need to be working directly with a professional tax advisor to ensure that you do things properly.

This is a perfect example of a very common way in which people accidentally commit tax fraud; by setting up assets converted from personal to business use at a much higher cost basis than is appropriate.  The tax law is very specific in the fact that converted assets are to be set up at the lower of their original cost or their current fair market value as of the date of conversion.  Under no circumstances could you increase the depreciable value above what your actual cost was.  To do so would essentially be giving you tax deductions on values to which you are not entitled.

That is the case for assets converted from purely personal usage to a new business usage.  In your case, you were already using the property in a business, so you have no justification whatsoever for modifying the cost basis for depreciation purposes in its new use.  You need to keep track of the original cost, along with the deprecation you had already claimed. 

If you were depreciating the structure over the 39 years required for nonresidential real estate, you can change the appropriate life to the 27.5 years used for residential rental property as of the date of the new use.  Again, you should have an experienced professional tax preparer do those calculations for you.

I hope this isn't too confusing and properly stresses how dangerous it is for you to continue to try to negotiate the  treacherous tax waters on your own.

Good luck.

Kerry Kerstetter

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On December 25, 2007, David Ingram wrote:

It is very unlikely that blind or unexpected email to me will be answered.  I receive anywhere from 100 to 700  unsolicited emails a day and usually answer anywhere from 2 to 20 if they are not from existing clients.  Existing clients are advised to put their 'name and PAYING CUSTOMER' in the subject line and get answered first.  I also refuse to be a slave to email and do not look at it every day and have never ever looked at it when I am out of town.  e bankruptcy expert  US Canada Canadian American  Mexican Income Tax  service and help

However, I regularly search for the words"PAYING CUSTOMER" and always answer them first if they did not get spammed out. For the last two weeks, I have just found out that my own email notes to myself have been spammed out and as an example, as I write this on Dec 25, 2007 since June 16th, my 'spammed out' box has 47,941 unread messages, my deleted box has 16645 I have actually looked at and deleted and I have actually answered 1234 email questions for clients and strangers without sending a bill.  I have also put aside 847 messages that I am maybe going to try and answer because they look interesting. -e bankruptcy expert  US Canada Canadian American  Mexican Income Tax service and  help

Therefore, if an email is not answered in 24 to 36 hours, it is likely lost in space.  You can try and resend it but if important AND YOU TRULY WANT OR NEED AN ANSWER from 'me', you will have to phone to make an appointment.  Gillian Bryan generally accepts appointment requests for me between 10:30 AM and 4:00 PM Monday to Friday VANCOUVER (Seattle, Portland, Los Angeles) time at (604) 980-0321.  david ingram expert  US Canada Canadian American  Mexican Income Tax  service and help.
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Disclaimer:  This question has been answered without detailed information or consultation and is to be regarded only as general comment.   Nothing in this message is or should be construed as advice in any particular circumstances. No contract exists between the reader and the author and any and all non-contractual duties are expressly denied. All readers should obtain formal advice from a competent and appropriately qualified legal practitioner or tax specialist for expert help, assistance, preparation, or consultation  in connection with personal or business affairs such as at www.centa.com. If you forward this message, this disclaimer must be included." e bankruptcy expert  US Canada Canadian American  Mexican Income Tax  service and help.

David Ingram gives expert income tax & immigration help to non-resident Americans & Canadians from New York to California to Mexico  family, estate, income trust trusts Cross border, dual citizen - out of country investments are all handled with competence & authority.

 

Phone consultations are $400 for 15 minutes to 50 minutes (professional hour). Please note that GST is added if product remains in Canada or is to be returned to Canada or a phone consultation is in Canada. expert  US Canada Canadian American  Mexican Income Tax  service and help.

This is not intended to be definitive but in general I am quoting $900 to $2,900 for a dual country tax return.

$900 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only (but were filing both countries) - no self employment or rentals or capital gains - you did not move into or out of the country in this year.

 

$1,100 would be the same with one rental

 

$1,300 would be the same with one business no rental

 

$1,300 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.

 

$1,600 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits  no move in or out

$1,700 would be for two people with income from two countries

$2,900 would be all of the above and you moved in and out of the country.

 

This is just a guideline for US / Canadian returns

 

We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $200.00 up.

 

With a Rental for $400, two or three rentals for $550 to $700 (i.e. $150 per rental) First year Rental - plus $250.

 

A Business for $400 - Rental and business likely $550 to $700

 

And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.

 

Moving in or out of the country or part year earnings in the US will ALWAYS be $900 and up.

 

TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.

 

8891 forms are generally $50.00 to $100.00 each.

 

18 RRSPs would be $900.00 - (maybe amalgamate a couple)

 

Capital gains *sales)  are likely $50.00 for the first and $20.00 each after that.

Catch - up returns for the US where we use the Canadian return as a guide for seven years at a time will be $150 to $500.00 per year depending upon numbers of bank accounts, RRSP's, existence of rental houses, self employment, etc.

Just a guideline not etched in stone. 

 

This from "ask an income trusts tax service and immigration expert" from www.centa.com or www.jurock.com or www.featureweb.com. David Ingram deals on a daily basis with expatriate tax returns with multi jurisdictional cross and trans border expatriate problems  for the United States, Canada, Mexico, Great Britain, United Kingdom, Kuwait, Dubai, Saudi Arabia, Thailand, Indonesia, Japan, China, New Zealand, France, Germany, Spain, Italy, Russia, Georgia, Brazil, Peru, Ecuador, Bolivia, Scotland, Ireland, Hawaii, Florida, Montana, Morocco, Israel, Iraq, Iran, India, Pakistan, Afghanistan, Mali, Bangkok, Greenland, Iceland, Cuba, Bahamas, Bermuda, Barbados, St Vincent, Grenada,, Virgin Islands, US, UK, GB, and any of the 43 states with state tax returns, etc. Rockwall, Dallas, San Antonio Houston, Denmark, Finland, Sweden Norway Bulgaria Croatia Income Tax and Immigration Tips, Income Tax  Immigration Wizard Antarctica Rwanda Guru  Consultant Specialist Section 216(4) 216(1) NR6 NR-6 NR 6 Non-Resident Real Estate tax specialist expert preparer expatriate anti money laundering money seasoning FINTRAC E677 E667 105 106 TDF-90 Reporting $10,000 cross border transactions Grand Cayman Aruba Zimbabwe South Africa Namibia help USA US Income Tax Convention. Advice on bankruptcy  e bankruptcy expert  US Canada Canadian American  Mexican Income Tax service and help .

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