All Forum Posts by: Gord Stevenson

In my opinion @Robert Herrera is right. It is about liability containment. If you are sued for something relating to a property held by an LLC, the idea is that your liability is capped at the holdings inside that LLC. Assets outside that LLC should be safe. Contrary to what some say, I do not believe there is any difference from the perspective of how much tax you ultimately pay versus holding assets in your own name. LLCs are supposed to be "transparent" from the perspective of taxation.

There are many with opinions that the liability protection of an LLC is not bullet proof. Possibly true but risk goes way down, as long as you operate the LLC "properly"...which means taking care of documentation and not mixing business related to assets inside the LLC with business related to assets outside the LLC. If you don't run the business of the LLC as a proper business (poor documentation and mixing business) it will be easy for others to make the case that the LLC isn't really a business and the liability protection should be void. Search on "piercing the veil".

So...your questions: an LLC doesn't come or go automatically. You set it up and do business in it. If your LLC sells a property and buys another, that is totally fine. You would decide how much/many assets to hold in the LLC based on your tolerance of risk versus administrative hassle. If you want to minimize risk then you would hold only one asset at a time in an LLC so any liability risk is contained to that one asset. However each LLC has a cost to maintain, and administrative workload. For Arizona, the state costs for setting up and maintaining an LLC are negligible if you fill out and submit the forms yourself. It sounds like some states are more expensive. In my opinion the biggest hassle related to an LLC in Arizona is filling out and submitting tax forms. Each LLC requires a 1065 tax return federally and a 165 tax return at the state level. So having two LLCs is twice the hassle and expensive if you need an accountant to do it for you. I believe you can group LLCs and consolidate tax submissions but I don't know enough about that to speak about the pros/cons or how to do it.

Thank you @Maripier Carignan. I hadn't heard this, but it appears true that the CRA is changing their position on LLPs. I had researched the topic thoroughly in 2009 when I started investing in the US and came to the conclusion that an LLP provided the best combination of liability protection and lowest US tax rates for rental income...for Canadians. Essentially the LLP acted like an LLC for US tax purposes, but did not attract double taxation like an LLC would in Canada. Now it looks like the CRA is taking a position that an LLP will be treated as a Corporation for the purposes of Canadian taxes, and that means that like an LLC you cannot apply a Foreign Tax Credit for tax paid in the US against Canadian personal taxes. Ouch! If that sticks, then those of us that used LLPs will have to figure out how to change it without triggering a deemed disposition and capital gains tax in the US. Argh!

I use a property manager so this is handled for me.  However, I just paid a contractor using Midfirst's (my bank's) "People Pay" service.  I am sure each bank has something similar but maybe called something different.  Anyway, it worked well.  The contractor got an email with instructions on how to deposit the money.  I don't think either of us paid any fees.  Maybe renters could send payments that way.

I have no credentials (disclaimer) but my opinion having used LLCs and LLPs (similar) for 7 properties:

1) I believe it is best for an LLC or LLP to be organized in the state in which the properties reside. The reason I prefer this have to do with taxation. I believe the state where the LLC/LLP is organized will want a share of income tax on those properties by default and you will have to demonstrate (through more forms) why they should not if the properties are in another state. Also, the state where the properties are may want you to file paperwork to notify them them that this "foreign" (out of state) entity is doing business in their state. For this reason I have an LLP in Ohio for properties held there, and a few in Arizona for properties held there.

2/3) I transferred a property from an LLC to an LLP when I learned that holding a property in an LLC may be problematic for residents of Canada (double taxation risk). LLPs are similar to LLCs, so I believe this is similar to transferring from personally held to LLC-held. Anyway, logistically I filed a "Quit Claim Deed" to make the change. A QCD is a light-weight way to change ownership without doing a full title investigation. The implication to watch for is that it is considered a deemed sale from a tax perspective. So if the property has increased in value then you may be triggering capital gains. If you use your old title company to make the change they may use a full deed (fine) but it will probably cost more than a "do it yourself QCD".

4) If your LLC is ready to go it is better to make the offer in the name of the LLC to avoid having to change it with a QCD or Deed later. Once, I even did a quick name check for a new LLC (to get some comfort that it would be approved), then submitted the offer in that LLC's name (which didn't yet exist), and completed the LLC registration in parallel. A bit risky, but it worked.

Having said all the above, I did not have the complication of a mortgage on these properties because I used line of credit funding on my principle residence.  So, that is a consideration around moving properties to different entities if you have that scenario.  Is the bank ok with the move?  Again, probably better to get it right at the offer stage rather than to move it later.

Any innovative ideas?  Thanks

One other thought that occurred to me: I use a property manager because I don't live near the properties so that may also reduce risk of being sued for something I might have done or not done as a "manager" of the LLP/C.

Only the judge in a court case can settle the question of liability for sure. Unfortunately we live in a world with complicated legal systems. Dave, I agree that an LLC won't take personal liability risk down to zero, but if it is properly used to avoid "piercing the veil" issues, I think it will dramatically reduce personal liability risk. Not to zero, but a major reduction...probably to the point where an opportunist looks at it and concludes it is not worth the legal fees to try to get you personally.

You then get to a point of diminishing returns where the extra complexity and cost of managing additional layers of protection exceeds the value.  Implementing and maintaining a trust for example is not trivial.

For the LLP (similar to LLC) approach I use, I am able to set it up and maintain it including filing US and Canadian income taxes without professional assistance. I think I would need legal and maybe accounting help ($$$) to add a trust or other layers.

My preference is to rely on the LLP/C backed by a decent amount of liability insurance. For me, if I was going to do something different it might be to do less...further increase liability insurance and hold the property in my own name to avoid the complexity of maintaining the LLP/C...mostly filing taxes for the entity. Having said that, my opinion could change if my estate was in the millions and therefore I was a more juicy target for opportunists. It's about probabilities and risk management.

An LLC should provide a measure of protection for your other investments or personal assets...from liability that occurs related to assets held by the LLC. For example, a tenant of a property held by the LLC sues you. If you are doing business in the name of the LLC they would have to sue the LLC. A couple of caveats and things to consider:

1) you need do do bisiness related to that/those properties under the name of the LLC consistently. Eg. Rental agreement in the name of the LLC. Rent income goes into a bank account in the name of the LLC. Expenses for the property paid for by the LLC. Search on "piercing the veil" for discussion about it, but do not necessarily believe everything. You will get the idea.

2) An LLC does complicate administration of the property. You would file a tax form for the LLC...then the resulting profit goes on a K1 form to inform your personal tax form. In my opinion the extra tax forms is the biggest additional workload over holding the property in your own name. Depending on the state the LLC is set up in, there may be an annual or bi-annual form to file to keep the LLC in good standing, but that is easy.

3) if you are a resident of Canada as I am, and setting up a US entity to hold a property in the US, a US LLC is not a good choice. I use an LLP (Limited Liability Partnership) instead. An LLP has the same liability protection but is set up with the State's Secretary of State instead of the Corporations Commission. The reason that an LLC is not good for Canadian residents is that we do not have the same LLC construct in Canada...so our tax authority would just hear "blah blah Company"..."Oh that must be a Corporation" and potentially disallow the credit for tax paid to the IRS for the LLC against tax due in Canada. Double taxation...not good. One disadvantage of an LLP is that there has to be at least two people to form a partnership.

4) if you don't want the complexity of an LLC or LLP to hold your property, another option is to buy more liability insurance. That won't provide true isolation of liability, but it will provide more coverage to pay for liability.

The bottom line for LLCs or LLPs is that they provide liability protection but do not affect taxation rates.  The mechanics of taxation change because there is another tax form to complete, but the tax rates etc are the same as if holding the property personally.  That's the difference with a Corporation.  A Corporation provides liability protection but the tax rates for rental income and capital gains are higher in most cases.

I bought a condo in Mexico for vacation rental income.  It has done fine for the intended purpose.  However, even though the purchase price was negotiated in US dollars, my understanding is that capital gains for the purposes of calculating Mexican Capital Gains tax the cost basis is set in Mexican Pesos.  

The impact is that even if the property is sold for exactly the same price in USD, there is a huge capital gain in pesos because the USD has gone from around 10 pesos to over 19 in 2 years.  That may mean a capital gain of 90%!

Any good ideas on how to avoid or minimize Mexican Capital Gains tax on sale of the property?

Thanks!