All Forum Posts by: Gord Stevenson

Regarding the deduction for a home office:  I am no expert, but if I was going to use that deduction I would fi4st investigate what impact that could have on taxation of the principle residence.  In Canada, we cannot deduct mortgage interest on our principle residence but then capital gains are not taxed.  So...in Canada, I would be concerned about having to pay Capital Gains on the portion of the house for which I was claiming business expenses.  

My understanding is that in the US you can deduct mortgage interest for your principle residence.  Losing some of that benefit might reduce the net benefit of deducting home office expenses.  Just a question...I really don't know.  Hopefully someone with more US tax experience can comment.

I described a spreadsheet that I use in this post:

Related post

Other posts in that thread may also be of interest.

I should have mentioned in my previous post that LLCs have never (well in recent years) been recommended for Canadian inverstors.  Until about a year ago LLPs were preferred for Canadians.  They operate almost exactly the same as LLCs but were (operative word "were") recognized in Canada as a personal income source rather than corporate therefore avoiding potential double taxation.  About a year ago the CRA (tax authority in Canada) changed their position on LLPs so if I were starting over as a Canadian investor I would probably just hold the property in my own name and seek liability protection through insurance.  This is a longer discussion and has been covered in other posts.  I just didn't want my previous answer to this thread (meant for American context) to be taken by Canadian investors without that context.  Thanks.

My two cents:

1. The only reason to use an LLC (assuming you use Partnership tax treatment) is risk reduction. Specifically containment of liability risk so the rest of your wealth is not attacked based on an incident relating to the property held in the LLC.

2. If you do it yourself the setup costs and ongoing administrative costs are negligible. Three points though: (1) while it is pretty easy to set up (my opinion) you need to research it and do it correctly. If you are not confident, then as another poster said above it may be worth getting it professionally done. In that case be sure the professional knows what he/she is doing...many don't. I used a paralegal the first time and, well, the experience wasn't great. (2) There are some ongoing practices you need to follow such as not co-mingling your personal and LLC finances that are necessary to preserve the liability protection (search on "piercing the veil"). (3) The only significant pain/cost going forward is the additional complexity and cost of filing another set of tax returns for the LLC (1065 and related forms). If you do it yourself (I do) it's a little painful and if you get it done it will be a significant cost.

(3) Easiest if you set the LLC up first and make the offer in the name of the LLC. if you don't then you need to transfer the property into the LLC after the fact (e.g. with a Quit Claim Deed). Related point: If you are using a mortgage it may have clauses in it to prevent or trigger actions if you do a transfer. Or, if you set up the LLC first there may be issues getting the mortgage at the rate you want. For our case we financed using a HELOC on our own home so did not face that issue.

(4) An LLC can have one of two different types of taxation rules applied: Partnership or S-Corp. We used Partership. With Partnership there is really no distinction between the entity and the partners for tax purposes. Profit just flows to the partners and is taxed there. I don't believe there is any "holding income in the company" aspect to it. I have no experience with S-Corp...but I will say that when I first researched this in 2009, at that time Personal/Partnership taxation was the least expensive option for both income and capital gains. S-Corp may be more expensive from a tax perspective. Going forward that may change with proposed tax reform, and for all I know it may have changed since 2009. But it is worth checking the tax rates.

There are some very good responses to the original question above.  I won't try to improve on those.  One additional thought regarding expenses though.  If you track your expenses in the same categories as the IRS uses, it is a lot easier to complete your tax return.  I use:  Advertising; Auto & Travel; Cleaning/Maintenance; Insurance; Legal/Accounting/Professional; Interest; Repairs; Taxes; Utilities; Depreciation; and Other.    I track expenses in an income/expense spreadsheet, and for the expenses those are column headers.  One row per transaction.  At tax time, I just go to the totals at the bottom of the spreadsheet for those columns and transfer them to the tax form.  Not what you asked, but related.  Cheers!

I am a Canadian with properties in the US...so the reverse to the OP's situation.  A few thoughts...that need to be verified since the situation is reversed:

1) you will likely need to file Canadian income taxes for rent received and later for capital gains when you sell.

2) there is a tax treaty between the two countries that intends to avoid double taxation, but you have to watch for situations where it doesn't work.  The idea is that if you pay tax to the foreign tax authority, then you claim it back as a "foreign tax credit" (FTC) from your own tax authority.

3) a circumstance where the tax treaty doesn't work, at least in my situation, is if the property is held in a manner for which the two countries see the income as being of different types. E.g. The US sees an LLC as personal income, and Canada sees it as corporate and Canada won't allow a FTC for tax paid on a different type of income. Another case here is that the FTC is credited against other tax owing...so if you have no other tax owing the FTC does not return the foreign tax paid.

4) you will benefit from currency exchange when sending money north to buy the property (yeah!) but the reverse will be true when any rental income flows south.  And, when you ultimately sell and repatriate your capital you may win or lose depending on how the exchange rate has changed over the duration of your property ownership.

Just random thoughts for consideration.

@Justin Currie Hi, I also live in Calgary and have invested in properties in Phoenix and Ohio.  I agree the prices and going rental rates in Calgary generally do not work well for new investors here.   I woipjld be happy to discuss experiences if you like.  Cheers!

When I researched it in 2009 (first property) the general advice was that both income tax and capital gains tax would in most cases be less expensive if taxed as personal income rather than corporate income. This could be accomplished by holding the property in an individual's own name...or by holding the property in an LLC and choosing partnership tax treatment. Between the two choices, the LLC added the advantage of liability cap protection. To verify this is still true you would need to check the current marginal tax rates for personal versus corporate income. My guess is that it is still true...but I believe Donald Trump has stated plans to reduce corporate tax rates so the story may change. Another question that I do not know the answer to is whether corporate entities are more complex or costly to maintain.

I have set up a few LLCs in Arizona. For the first one I used LegalZoom or one like it. It was not worth the money. For one thing they provided the Operating Agreement as a PDF (not changeable) so I would have to go back to them for any minor change. It is easy to do it yourself. Just go to the web site and follow the directions. Find a sample Operating agreement to customize for yourself.

I am Canadian and have several properties in the US.  Two things:

1) I used equity in my home in Canada to fund purchases rather than taking out US mortgages.  Within the constraints of the available equity that strategy has been good.  (a) the interest rate has been considerably lower than I would have paid for US mortgages.  (b) I was able to act more quickly and decisively and probably achieve slightly lower purchase prices because the offers were then cash offers.  One downside is that the Canadian interest cannot be deducted against US rental income according to the IRS because the debt is not registered against the property.  However it can be deducted in Canada so I think that works out ok. Anyway my interest rate has been at least 2% lower so even if my specific tax situation was such that I didn't get all of the deduction benefit in Canada it still would have been financially better than using US mortgages.

2) this one was a mistake. I went with holding properties in US (Arizona and Ohio) LLPs. Reasoning was that tax rates in the US for both rental income and capital gains were lower for properties held personally from a tax perspective (in own name, or in LLP or LLC) than for those held in a corporation. So that ruled out a corporation. And LLCs faced double taxation while it was said that LLPs wouldn't. Hence LLPs.

Now, well after that decision was made it has turned out to be a mistake because the CRA in Canada is in the process of changing their position on Partnerships with limited liability (LLP, LLLP). So far they have ruled that partnerships in Delaware and Florida are now going to be treated as corporations in Canada which means double taxation. Foreign Tax Credits cannot be used to claim back personal income tax paid in the US against corporate income tax due in Canada, and the CRA is now saying they see that income as corporate income. It is likely that they will expand this to partnerships organized in other states. That means I will have to convert my LLPs to LPs which means losing the liability protection, but retaining the administrative complexity (additional tax submissupions for each LLP). This is a very disappointing act by the CRA which seems to only hurt Canadians without generating any benefit to anyone. The whole point of the tax treaty is to avoid double taxation and they are creating a technical argument to void that intent, but there it is.

If I had to do it again I would have simply held the properties in our own names and mitigated risk with extra liability insurance. It isn't the same as the liability containment of an LLP, but does reduce risk, and in my opinion the double taxation issue now rules out use of limited liability partnerships for Canadians investing in the US.

I would be happy to hear others' opinions and interpretations of the tax rules. If you want more information on the LLP tax issue I am referring to, simply search on LLP and CRA and Delaware and look for entries starting around May 2016. You will also see entries around December talking about how the CRA is going to be generous and give us until the end of 2017 to convert LLP/LLLPs to LPs to avoid the double taxation.