All Forum Posts by: Gord Stevenson

@Stuart Bartwicki welcome.  I also live in Calgary.  I have not invested in Canadian real estate, but I have invested in properties in the US. I would be happy to share experience when you are ready.  Cheers!

When I first set up LLPs (similar) it was easy to find businesses that would provide this service for a fee. Paralegals etc. But frankly they don't have to do anything except receive a legal notice if one ever occurs, so really anybody local can do it. In one case my real estate agent let me use him and his address. In another the Property Manager helped with that.

An important consideration is what you think the currency exchange rate will do.  Let me provide an example of why it is important:

I bought a condo in Puerto Penasco a few years ago when the Mexican Peso (MXP) was about 13:1 to the US dollar.  Now the MXP is about 20:1 to the US dollar.   So what, you might ask.  Deals are struck in US dollars.  Ok, but here's the problem:

Property sale prices in Mexico are actually recorded on the deed in Mexican Pesos, even if the property was advertised in USD and the deal was struck in USD.  Rightfully so.  

But now assume that I sell the condo for exactly the same price in US dollars.  When the sale price is now recorded at 20:1 I am looking at a 50% Capital Gain (20/13) according to the Mexican tax authority.  So, I would owe something like 15% of the sale price in Capital Gains tax, assuming a 30% tax rate.  

Brutal.

So, it you think the USD will appreciate further against the MXP, then you unless you think the Mexico property will appreciate much faster than the US property then you may want to go with the US property.  Of course if you think the USD is now out of line with other currencies and will weaken then this is not a concern.  Who knows?  Currency traders make the wrong call half the time so I certainly would not be qualified to guess.

In my case if I were to sell there has been a real price appreciation in addition to the paper (currency-based) capital gain so I would probably break even, so not a disaster.  But certainly the currency issue is material.

@Mark S. Yes, ideally I would set up the LLC's bank account as early as possible and pay all expenses from there. Where that is not practical I would record any expenses paid from a personal account as a loan or equity infusion from the owner so your records clearly show an intent for the LLC to operate independently from you the individual.

The main purpose of an LLC or LLP is to contain liability within the LLC/LLP so that your other assets are safe(r). However, if you commonly mix personal and LLC business the liability protection can be lost. Search on "piercing the veil". It is better to have a separate bank account in the name of the LLC, and pay all LLC expenses from that account. Where that isn't practical, I would record the expense and note it as an "owner contribution" or in accounting terms an increase in "owner equity" or as an owner loan. Later, when the LLC's bank account is flush from incoming revenue then you can pay back the owner loan or reduce equity by reversing the contribution. I.e. Make it clear in your records that you and the LLC are operating independently.

When I researched this a few years ago my findings were: 1) To protect my other assets from any liability issues related to these investments required the properties to be held in a corporation, a LLC, or a LLP (or LLLP). 2) To minimize income and capital gains tax an LLC or LLP was better than a corporation. LLC/LLPs are flow through entities so the tax outcome is the same as if you hold the properties in your own name. Corporations are (or were) taxed at higher rates for both rental income and capital gains. 3) For Canadians, a LLP was better than an LLC because the LLC could attract double taxation. Note that this is changing for Canadians and now both LLCs and LLPs have this problem. 4) For US residents the LLC and LLP options are pretty similar. In Az the LLC is formed under the Arizona Corporations Commission while the LLP is formed under the Secretary of State. For taxes, the IRS treats them the same...same forms, same tax treatment. An LLP requires at least two "partners" while an LLC can have one or more. 5) One significant downside of using any of the entity types rather than holding the properties in your own name(s) is the extra administrative effort and/or cost. If you do your own admin and file your own taxes it is very inexpensive in Arizona to set up and maintain an LLC or LLP. But the extra tax-related paperwork is significant because you have to file tax returns for the entity in addition to your individual returns. I went with LLPs because my wife and I are Canadian residents, because we wanted the lowest taxes and because we wanted liability isolation. With the new rules (as they are shaping up) it looks like the only reasonable options are corporations on both sides of the border (expensive to maintain, higher tax rates in US) or LPs (does not preserve liability protection for the general partner) so those are not attractive. Now, with the changing Canadian tax rules, had I known I would have just held the properties in our own names and bought more liability insurance. Caveats: 1) I read on BP that it is much more expensive to maintain entities in California...or maybe it is not the entity but some sort of levy for those investing in rental properties. I suggest a search on that because I don't remember the specifics 2) I am not a professional...these are just learnings from reading that I have done. Please verify anything I have said before relying on it. Cheers

I use a spreadsheet with a sort of double entry accounting. Each row is a transaction. Columns for: - date - bank account debit - bank account credit - property manager account debit - property manager account credit - rental income (credit) - other income (credit) - one column for each type of expense using the categories that the tax authority uses for tax returns (about 10 of them...all debits) - depreciation (debit) - accumulated depreciation - owner equity (credit) - a check sum column Each transaction must have the same amount of debits and credits, and the check column does the math to prove it...and should always be zero after debit and credits are recorded E.g. Collect rent: enter $1000 in the bank account debit column and $1000 in the income (credit) column. If the property manager gets 10% then income is $1000 (credit), Professional Expense is $100 (debit) and Bank account debit is $900. Credit total equals debit total. E.g. Pay tax bill: Credit Bank Account $900 and debit Tax Expense $900. At the end of the year, I transfer the income and expense totals from the bottom of those columns to my tax form. One spreadsheet tab per year. Opening balances at the top. I also "close out" previous year expenses at the top so I can bring over past balances, and close them out (to equity) so income and expense columns start at zero before the first transaction of the year. This works very well if the number of transactions isn't too high. For properties with a property manager I end up with 12 (1 per month) transactions with each representing a monthly statement plus about another 15 or so for transactions that do not go through the property manager. I have one vacation rental that I also use this for and I probably have 150 transactions in a year. This still works but is starting to push the method. It sure helps at tax time. But you do need to know accounting basics to determine the debits and credits in a transaction. Any accountant would understand the spreadsheet after looking at it for 2 minutes. I find this easier (for me) than Quickbooks etc because since it is my spreadsheet I thoroughly understand how it works. I always found Quickbooks as having a certain amount of black magic in it, although if I had truly spent the time I could have learned the magic. Oh yeah, and it was free! And I am frugal. This is for accounting only and does nothing for tracking maintenance or other "property management" functions...other than I can track maintenance in "comments" attached to cells where I record an expense.

I have a good one. The property is a SFH with pool in Phoenix. Tenants are nice enough but totally helpless and don't lift a finger. Neighbor calls me and tells me one of the three trees on the property is lifting the block wall fence. I send a tree contractor as I live far away and my local Property Manager has been dropping the ball on significant maintenance items lately and I have decided to bypass him on this one while I figure out what to do long term for maintenance. So this is a bit of a trial for a new contractor. Anyway, he assesses the situation and determines that the tree in question really has to go, but frankly the other two should as well. He sends pictures. Tree 2 is damaging the house, and tree 3 is too close to the pool. I consult with the neighbour who agrees with the assessment. All the while the tenant's husband is lobbying HARD for the removal of the only one that might be salvageable because it is hanging over the pool dropping stuff into the pool and causing him work. I have other evidence he is not doing well looking after the pool anyway so "scr3w it...all three are coming out". It's me that pays the bill when the pool pump needs replacement. Done deal. So, the tenant comes home and texts me "So are you putting in some more trees? I want trees!". Seriously, are you kidding me? "Well I wanted to keep the tree by the pool." Well, maybe you should talk with your husband. Haha. Then she asked for the back yard to be grassed. Huh? Listen lady, you can't even clean your house. There was a grass area, you did not care for it and your stinkin' dog finished it off. It is Arizona. Desert landscape. Postscript: I sent the contractor again for a maintenance inspection, and her husband was nowhere to be found. She made a point of being there herself. :-)

@Michel Lambert I am not sure if links are allowed, but let's try.  If they don't show up, just Google "CRA treatment of LLPs" and you will several hits.

http://www.krp.ca/cra-changes-treatment-of-u-s-llp...

http://moodysgartner.com/cra-confirms-us-lllps-and...

https://www.grantthornton.ca/resources/insights/ar...

@Mike Lambertundefined

The main objective in using an LLC is liability protection. That liability protection can be lost (search on "piercing the veil") if business matters that are supposed to be conducted under the LLC are mixed with personal business. The LLC should be filing income taxes and using its own bank account set up under the LLC's identity. Both need the LLC's EIN. It is not hard to get an EIN for the LLC.