Post on 21-Dec-2015
Tax Tips for Real Estate Investors
By: Allan Madan, CPA, CAMadan Chartered Accountant
Topic of discussion:
•Pros / Cons•Types of ownership•U.S. tax forms
Personal investment
Personal investment
Pros Cons
• Simplest structure – no significant set up cost
• Lower annual compliance cost (tax, state, etc)
• Easier to obtain mortgage
• Access to the U.S.’ long term capital gain tax rate (if held > 1 year)
• no liability protection (insurance is a must)
• Estate tax may apply for individuals with over $5M in worldwide net assets
• Probate fees may apply depending on each state
Personal investment
Estate tax in more detailo Unlike Canada which imposes tax on the accrued gain of a
deceased taxpayer at the time of death, the U.S. imposes tax on the net asset of the taxpayer at the time of death
o For Canadians that are not US residents, estate tax applies on the value of their U.S. assets if the FMV of their worldwide assets exceed $5.34Million (2014)
Personal investmentEstate tax in more detailo Under the Canada – U.S. tax treaty,
U.S. allows two major credits to reduce or eliminate estate tax for Canadian residents:o Unified credito Marital credit
Personal investment
Estate tax – Unified credit
The U.S. allows Canadian taxpayer to reduce their U.S. estate tax liability by the following amount:
Personal investment
Estate tax – Unified credit – Example
Facto U.S. stock holding:
$1Mo U.S. Real estate:
$2Mo Total worldwide
asset: $10M
US estate tax $1,145,800
Less: Unified credit $624,540
US estate tax $521,260
Personal investment
Estate tax – Marital credit
The U.S. allows Canadian taxpayer to double the unified credit if the U.S. assets are passed on to their Canadian resident spouse
Personal investment
Estate tax – Unified & Marital credit – Example
Facto U.S. stock holding: $1Mo U.S. Real estate: $2Mo Total worldwide asset:
$10M* U.S. estate tax liability
cannot be reduced to below zero
US estate tax $1,145,800
Less: Unified credit
$624,540
Less: Marital credit
$521,260*
US estate tax $0
Personal investmentEstate tax – How to plan
for ito Life insuranceo Consider different
structure including Canadian corporation (be aware of double tax)
o Obtain non-recourse mortgage for U.S. property (reduces value of U.S. asset)
Personal investment
Tax reporting – each investor must obtain/submit:
o Individual Taxpayer Identification Number (ITIN)
o Form W8-ECI to property manager (reduces withholding tax to 0%; else 30% applies)
o Form 1040NR – U.S. Nonresident Alien Income Tax Return (Usually due June 15)
Topic of discussion:
•U.S. Limited Partnership•U.S. Limited Liability Limited Partnership•Potential structures for avoiding estate tax•U.S. tax forms
Investment via U.S. Structure
U.S. Limited Partnership
Pro Con
• Offers limited liability protection for investors (the general partner bears the risk)
• No double taxation issue
• Flexibility in terms of adding or removing investors
• Set up cost can be significant
• Must manage various annual tax and other compliance requirements
• Estate tax will apply on the U.S. Partnership interest (considered U.S. – situs asset)
Sample structure:
U.S.
Canada
U.S. C-Corp (General Partner)
U.S. Limited Partnership
Husband (Limited Partner)
Wife (Limited Partner)
U.S. Real estate
49.5%
49.5%
1%
U.S. Limited Partnership
U.S. Limited Liability Limited Partnershipo Only available in certain states (~27
states)o Florida, Arizona, Hawaii, Texas, Illinois,
Iowa, etc
o Works same as limited partnership except the general partner also has limited liability protection (ie. every partner has limited liability protection)
o No need for another C-Corp to act as general partner (reduces set up and annual compliance cost)
Structure idea:
U.S.
Canada
U.S. LLLP
Husband Wife
U.S. Real estate
49% Limited Partner
1% General Partner
1% General Partner
49% Limited Partner
U.S. Limited Liability Limited Partnership
Upon death, the Canadian’s U.S.
partnership interest will
constitute part of his/her U.S. asset for the
purpose of U.S. estate tax
A potential solution is to own the U.S. partnership
interest via a Canadian
partnership
A Canadian partnership
interest does not constitute
U.S. asset
Potential Structure for Avoiding Estate Tax
U.S.
Canada
Canadian Corp (General
Partner)
U.S. Limited Partnership
Husband (Limited Partner)
Wife (Limited Partner)
U.S. Real estate
1%
U.S. Limited Partnership (Limited Partner)
1%
49.5% 49.5%
99%
Potential structure for avoiding estate tax
o Caution:o The IRS have not
formally declared whether they will consider Canadian partnership interest which holds U.S. real estate partnership interest as part of U.S. assets for the purpose of U.S. estate tax
U.S. tax reportingo Personal Obligations:
o Obtain ITINo Submit Form W8-ECI to the
partnershipo File Form 1040NR – Nonresident Alien
Income Tax Return
o Partnership Obligations:o Remit withholding tax on a quarterly
basis (39.6% of income attributable to non-U.S. partners)
o File Form 8804/8805/1065 by March 15 (Partnership returns)
Partnership Obligations (cont’d):• File annual compliance
form with fee to the State (non-tax)
Corporation Obligations:• File Form 1120 or
1120-F by March 15 (Corporate tax return
• File annual compliance form with fee to the State (non-tax)
U.S. tax reporting
U.S. tax reporting - remindero Most state also require
separate tax filing which may or may not have the same filing due date as the federal returns mentioned in the presentation
o Same with withholding tax requirements
Double Tax Problemo S Corporationso LLCo Flow-through for USo Corporation for Canada
Three tier structure for investment properties
o The Three tier structure is designed for and used by real estate investors. It consists of three corporations:
1) A management corporation2) A Real Estate company3) Holding corporationo For more information, please
visit http://madanca.com/blog/benefits-three-tier-structure-real-estate-investors/
o Tax Account Numbero Mandatory to obtain a tax account number so the CRA can
track your tax filingso Withholding Tax
o Withholding tax applies at a rate of 25% on the rents that you collect in Canada
o NR6 Formo This form reduces the withholding tax
Tax Issue for Non-Resident Investors
o NR4 Slipo This slip reports the gross rents you collected and
the total withholding tax you remitted to the CRA.o You have to collect this form no later than March 31st
of the following year or you will face a penaltyo Annual Tax Returns
o Annual tax returns must be filedo Section 216 tax return is due by June 30th of the
following yearFor more information, please visit
http://madanca.com/blog/non-resident-tax-on-rental-properties-in-canada/
Continued...
Disclaimero The information provided in this presentation
is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this presentation.