My wife and I are buying an rental investment property in Phoenix AZ. From what I have read on the Internet, in my humble opinion,placing the title as Community Property with the Right of Survivorship is preferential to holding it as Joint Title with the Right of Survivorship. The community property option allows a full step up in basis upon the death of a spouse, thereby offering significant tax savings in the event of capital gains when the property is sold.
Are there any other considerations, that my wife and I need to consider, being Canadians, in making this title decision? Thank you.
david ingram replies:
Under Canadian law, it does not make any difference. If you pass and leave it to your wife, she gets it at your cost base UNLESS, your estate elects to step up the value AND PAY TAX ON THE INCREASE ON YOUR FINAL RETURN - However, in general 99 out of 100 will pass it at the cost price. when this happens, you are now out of step with the US return which is cumbersome when it comes to things like foreign tax credits. However, I agree - Community property makes the most sense for you for the US purposes.
.
For other ideas, you should read these older questions.
Subject: Canadian buying US Property
Expert: [email protected]
Date: Thursday January 31, 2008
Time: 09:56 PM -0000
QUESTION:
David,
I am a REAGGIE.
Any past articles or advice on a Canadian buying in Palm Springs, CA.
Going to buying for investment purposes with hopefully rental income form vacation/tenant options.
Concerned about tax implications, property taxes, IRS, estate fees and anything else you can think of.
Thanks,
----------------------------------------
For others, the writer is referring to Ozzie Jurock's excellent Real Estate Investment Groups. Find out more at www.jurock.com
To the questioner
You likely need to buy an hours consultation. It is too bad that you missed Ozzie's Jan 6 seminar.
I am just answering with a series of old questions -
-------------------------
I am a Canadian citizen and I want to buy property in somewhere in Texas. Do I have to pay any different tax?
Thank you
------------------------------
------------------------------------------
Hello David,
There are no restrictions. He can buy anything he can afford but can NOT do any work on it if it is a rental property.
He does not need anything but a Canadian Passport to go to the US to buy the property.
And, if going by land, he only needs a valid Canadian Governor driver's licence with a picture on it AND a birth certificate or a Canadian Heath Card.
=================================
Subject: Filing tax on New Rental Property Texas
Expert: [email protected]
Date: Saturday January 19, 2008
Time: 05:23 PM -0000
QUESTION:
We are Canadians and acquired a residential property in Texas in Dec 2007. We have a property manager and sent in applications for ITINs.
Our intention is to rent the property out for a number of years and then reside in it seasonally.
We will have to seek representation for future tax filings but have a number of questions:
1. Well we haven't rented out the property yet, we incurred expenses in 2007(legal, renovations, interest, property management).
Can we carry forward these expenses to filing in both jurisdictions in 2008 ?
2. We did two trips in 2007 for searching for
properties in the location before we bought. Are the costs associated with these trips, deductible in both Canada and US filings?
3. Depreciation - our intention after renting out the property for a number of years is to use it as a secondary residence. What are the considerations concerning deducting depreciation with any future disposition?
david ingram replies:
1. Any expenses for the purchase and getting ready for rent are NOT deductible against current income.
They CAN be added to the principal and deducted in the future against any capital gains when you sell it And be depreciated in the meantime.
As an example:
You buy a unit for $194,000. and spend $2,000 legal expenses and $4,000 travel (to buy) for a total of $200,000
The municipal appraisal is for $150,000 and says the land is worth $75,000 and the improvements (bldg) are worth $75,000
You would set up the opening depreciation schedule in the US (schedule 4562) as Land $100,000 - Building $100,000 as a proration of the $200,000 you paid.
You would do the same in the CCA spot on Canada's T776.
The Improvements and any carrying costs would then be added to the cost of the building.
So if you spent $18,000 on improvements and another $2,000 in interest for December, you would then add $20,000 to the cost of the bldg in both countries and the depreciation schedule would show land $100,000, Building $120,000.
That presumes that the property was not available to rent at the time because of the remodeling.
2. After purchase, trips to Texas to look at the property or deal with matters are not deductible even though there are lines on the return for auto. Auto expense is to use your car, etc for repairs or to carry your lawn mower and is not designed for you to drive 2,000 miles.
In addition, since you can NOT do any repairs or improvements or even collect the rent for the Texas unit, there can NOT be a claim for going to Texas for you to physically paint or clean.
But even if the unit was in Nova Scotia where you can paint and clean, that travel expense is not deductible although the CRA and IRS tend to overlook the claim if made.
If you had bought it in September and the unit was available on Oct 1 and did not rent for Oct, Nov and December, than you would do as above with expenses up from the day it was available and be able to deduct condo fees, taxes, interest, utilities, advertising, long distance phone calls, management, etc on US schedule E on form 1040NR (one of each of you if in joint tenancy) AND schedule T776 in Canada.
3. Note that depreciation 'has to be' claimed on schedules E and 4562 under US law even if it creates a loss.
In Canada CCA (depreciation) can NOT be claimed unless it is used to reduce a profit. CCA in Canada can NOT be used to increase or create a loss for rental property whether it is a jet engine, a motorhome, ski cabin in Whistler or condo in Florida.
If and when you sell the property, both countries tax the recapture of depreciation or CCA. So unless you tear the old building down (no recapture) any tax you save in the interim has to be repaid, in both countries. I prepared a Hawaii tax return today where the depreciation claimed over the last 20 years resulted in a $32,000 tax bill today.
In addition, under sections 45(4) of the CANADIAN Income Tax Act, if you have depreciated the unit and then convert it to a personal unit in the future, you must pay any capital gains tax and any recapture tax when you move into it as your own. If you rent it out withOUT claiming Canadian depreciation, section 45(3) allows you to delay paying any capital gains tax until the actual sale when you convert the rental unit to personal use.
Because your property is in Texas, there is no state return to prepare as there would be in Vermont, California, Arizona, and another 40 states.
-------------------
The following was given out at a recent seminar for Ozzie Jurock's Real Estate Action Group (REAG) which you can find out about at www.jurock.com.
QUESTION: I am looking at buying property in the US. What tax implications should I be looking at beforehand? Also, can trips taken there to look at properties be claimed as an expense after I've bought? Can trips just to look be claimed against anything (what if I look in Vegas, Arizona, and Portland, but only end up buying in one or none).------------------------------------------------
david ingram replies:
I actually spoke to 113 people at Ozzie Jurock's Seminar at SFU on Monday Night, Jan 7 2008.
The trips are not a writeoff against other income. If you buy something they can be addded to the cost of the property you did buy.
i.e., if you spent $5,000 on trips and paid $200,000, the cost of the unit for future depreciation purposes would be $205,000 less any land value.
It would also affect any future taxable capital gains when you sold the property.
Remember if you do a piece of real estate for investment, you can NOT do any work on it whatsoever. If you do, you risk jail, fines and being banned from the US for 3, 5, 10 year or even forever.
The following two pieces plus a sample US rental tax return were handed out at the seminar.
ONE dealt with the working issue and what forms to fill out.
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
Jan 6, 2008.
Rentals in the USA.
QUESTION that came to me from ASK AN EXPERT at www.jurock.com
We just purchased property in Spokane
Washington( a 4 plex apartments)
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.
----------------------------------------------------------
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 uscis 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, bing 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.
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
-------------------------
The
second dealt with making your personal mortgage interest in Canada deductible
and the Overs, Evans, Lipson and Singleton tax cases and
GAAR
David Ingram's US/Canada
Services
Mortgage Interest as a Deduction in 2008 – dealing with GAAR
I first conceived of this method in 1975/76 when a client of mine had a rental duplex and had a tenant who was injured in a car accident. It was at the time of the changeover from private insurance to ICBC and the injured single mother tenant was waiting for an insurance settlement.
My client allowed his tenant to stay in the half duplex for more than a year and to stay afloat him self, he borrowed money to pay the duplex bills. When doing his 1975 tax return, we deducted the interest paid on the loan because the purpose of the loan was clearly to fund the rental duplex.
When he finally got his cheque for more than $5,000 from the tenant, it would have been all over if he had just paid the loan off and we had not thought about it. But my client, bless his soul, phoned and asked if he had to pay off the loan (which was deductible) or could he use the money for another non-deductible purpose.
My answer, after thinking about it for a day or so, was that he could us e the $5,000+ for any purpose he could think of. At the same time, I said this, I was also writing something for the North Shore Credit Union and put my ‘new’ method of making the mortgage interest deductible in this report which they then published as part of an advertisement in the North shore News in (I think) November, 1976.
I expanded it and it was next published by Hancock House Publishers in my Investment Guide in 1979, 1980 and 1985 and 1991 and BC Business magazine in 1979. Sometime in there, the Ontario Dental Association also ran it in their magazine. It then became part of the Internet and can be found in the March 1997 and November 2001 newsletters.
I was pretty heavily involved in the Federal Conservative Party (ran for the North Shore Nomination in 19780 and am proud to say that we got mortgage interest as a tax deduction on the 1979 federal Income tax return.
Unfortunately, Joe Clark, the Prime Minister at the time, did not count the number of yes votes and lost a non-confidence motion on Dec 12, 1979, and on Feb 18, 1980, Pierre Trudeau was re-elected as Prime Minister and even though there was a 4-page form and a line on the T-1 General that year, the deduction was killed retroactively by the liberal government and we no longer had this benefit for all without manipulating the paperwork.
In 1981, Fred Snyder was running a series of seminars and teaching my method to a lot of different groups. In one seminar, he taught it to Realtors, McCauley, Nicolls, Maitland and Company and the manager Fraser Smith wrote Fred a letter thanking him for explaining the methods. In 1985, Fraser Smith than published the SMITH MANOUVRE which explains the method in great detail and at the time, VANCITY Savings Credit Union was featured in the book and was very good at setting up the method.
Then on Oct 27, 1988 John Singleton had approximately $300,000 in his lawyer’s capital account. He got permission to take the $300,000 out (it was his but was being used as security in his law practice). He used it to buy a house and then used the house as security to borrow $300,000 which he then put into his capital account; this was all done in one day. Of course, since the money in the account was now borrowed for business purposes, he deducted the interest on his 1988 and 1989 returns and the Tax Department turned him down. He appealed and lost in the Tax Court of Canada but won in the Federal court of Appeals. The CRA appealed to the Supreme Court and in October 2001, the Supreme Court of Canada found in favour of John Singleton in a 5 to 2 decision.
This case has now been
quoted and cited in many other cases. In OVERS 2006 TCC 26,
Mr Overs paid back a shareholder-loan, which
would have been included in his income. By doing what he did,
co-incidentally, the interest expense was made deductible.
Mrs Overs borrowed funds to purchase shares of his
holding company at their fair market value. However, Mr Overs
did NOT use a 73(1) rollover as Lipson did. Therefore, no
capital gain was realized but the attribution rules in section 74(1) worked to
transfer the interest expense on the wife’s borrowed funds -- back to
him.
Judge Little turned down the CRA’s claim that tax
benefits arose from this series of transactions. The taxpayer
followed the Income Tax Act in repaying his loan and transferring the
shares to his wife. Justice Little ruled that the transactions were NOT
avoidance transactions and therefore GAAR did not apply. Judge Little ruled that
none of the transactions could be considered “abusive tax avoidance”.
And Judge Bowman ruled in
favour of Evans
(2005
TCC 684). Judge Bowman found there were no avoidance
transactions in what could only be described as a super complicated and very
sophisticated series of business restructurings that ended up with a former
shareholder receiving cash by using specific rules in the
Act, including sections 85
(rollovers), 110.6 (capital gains exemption), 112
(tax free inter-corporate dividends), 74.5 (attribution) and ss. 84(3) (deemed
dividends).
Judge Bowman assumed that there ‘were’ avoidance
transactions. He then dealt with them on an individual basis
to decide whether the avoidance transactions were ‘abusive’.
His final decision was that provisions of the Income Tax Act operated as
intended and there could not be any abuse.
However, he was not of the same opinion with the
LIPSON Family who lost in Lipson v. The Queen, 2006 TCC 148
Mr Lipson owned a profitable business and:
- The Lipsons contracted to buy a home in Forest Hills in Toronto
- Mrs Lipson took out a demand loan to buy share in the family business from her husband.
- The shares were transferred to Mrs Lipson as a section 73(1) rollover
- Mr Lipson used the funds to buy the house
- They “both” took out a mortgage on the house to repay the demand loan
Judge Bowman used
the Section 245 GAAR provisions to rule that the Lipson family was guilty of
Gross Abuse of the Tax system. Perhaps, if they had a
business reason for the loan or had not used the Section 73(1) tax free
rollover, he would have found in their favour as he did with the EVANS 2005 DTC
1762 case. In the LIPSON case the wife’s borrowing did not
put income in her hands and it was unclear who had paid the
interest.
--------------------------------------------------------------------------------
This older answer about PALM SPRINGS might also help.--
QUESTION:
1. Can a Canadian citizen with business in Canada buy vacation house in USA.
--------------------------------------------------------------------
david ingram replies:
1. Providing you do not have a criminal record which would stop your going to the USA, there is no reason why you can not buy a vacation home in California, Arizona, Texas, Florida, Alaska or any other US destination if you can afford it.
2. I usually recommend that you borrow half in Canada and half in the US. That will always qualify you for the US mortgage and you are moderately protected from foreign exchange which can be devastating. Use your Canadian house as security for the half down in the US. And, of course, the same thing is true in reverse.
When you go to sell, you will pay tax first in the US (and maybe a state tax in California, Arizona, South Carolina, Vermont, etc.)
This older question may help
------------------------------------------
Hi,
My wife and I are looking at possibly purchasing a condo in Palm Springs for our retirement. We are both 50 years old and plan on working for the next 7 or 8 years. Our plan is to purchase and use it a few times a year and rent/lease it out for the remainder of the year until we reach retirement at which time we would spend 4 or 5 months a years there. Looking for some advice on what we should be looking out for and what would be a better choice mortgage wise, U.S. or Canadian funding. Or is it a good idea at all to purchase U.S. real estate as a Canadian? Any advice or literature that's out there that you could direct us to would be greatly appreciated. Thanks!
xxxxx xxxxxxxx
david ingram replies:
If your intention is to start spending significant time there, buying now is extremely sensible because you are buying it at today's price which will logically go up in the future. You 'are' of course, also dealing with exchange.
Since your earnings are in Canadian dollars, borrowing the money in Canada and paying cash in palm Springs means that you will be paying in a known currency.
To explain that statement, persons who bought in 1991 with a US mortgage payment of $1,000 needed $1,145.87 Canadian dollars to make the payment. By 2001, they needed $1,548.62 to stay even.
However, in reverse, if you bought in 2002, you needed 1,570.36 and only need about $1,060 to stay even today.
Currency exchange does go both ways.
You might want to borrow half in Canada and take out a mortgage for half in Palm Springs.
If you are renting the property, you will both need to file a US Federal 1040NR with Schedule E and California 540NR return and then change the currency to Canadian and file form T776 with your Canadian T1 returns. Failure to file the form 1040NR can have penalties of $1,000 to $10,000 per year per return per person even if you lose money. A very real problem is that all sorts of Canadians approach a US accountant and ask about filing and are told they do not need to file a return because they are losing money. Not so. When it comes time to file, hunt down a specialist in dual country tax returns like Gary Gauvin in Dallas,, Steve Peters in Halifax, Kevyn Nightingale in Toronto, Brad Howland in Victoria or myself in Good Olde North Vancouver.
Whatever you do, do NOT buy it in a corporate name. You will not save anything and end up with another $2 or $3,000 of accounting fees.
You will also need to file personal US tax returns if you are there more than an average of 120 days a year.
The following is from my April 1994 newsletter which you can find at www.centa.com in the top left hand box. Note that it was written in 1994 and still apropos today.
- my system would not allow this to be included - some permission setting. - you will have to go to the web site www.centa.com to read it but you should if in this position -
--------------------------
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
My Home office is at:
North Vancouver, BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325
Calls welcomed from 10 AM to 9 PM 7 days a week Vancouver (LA) time - (please do not fax or phone outside of those hours as this is a home office) expert US Canada Canadian American Mexican Income Tax service help.
$1,700 would be for two people with income from two countries
Catch - up returns for the US where we use the Canadian return as a guide for seven years at a time will be from $150 to $600.00 per year depending upon numbers of bank accounts, RRSP's, existence of rental houses, self employment, etc. Note that these returns tend to be informational rather than taxable. In fact, if there are children involved, we usually get refunds of $1,000 per child per year for 3 years. We have done several catch-ups where the client has received as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund.
Email and Faxed information is convenient for the sender but very time consuming and hard to keep track of when they come in multiple files. As of May 1, 2008, we will charge or be charging a surcharge for information that comes in more than two files. It can take us a valuable hour or more to try and put together the file when someone sends 10 emails or 15 attachments, etc. We had one return with over 50 faxes and emails for instance.
--IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, please be advised that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used or relied upon, and cannot be used or relied upon, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.--
-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 or www.garygauvin.com. If you forward this message, this disclaimer must be included." -