I think your profit is taxable, unless you are selling an asset and taking the profit from the sale to do a 1031 transfer to defer your capital gain by reinvesting.

Here are some numbers we are looking at:If the seller sells on the open market, this would be his approximate situation:Sale price = $200,000Realtor commissions (6%) = $12,000Payoff mortgage = $125,000Money back before taxes = $63,000Tax bill (assume taxable gain of $150,000, capital gains of 28%, state of 5%) = $38,000Net money to seller = $25,000If we transfer the property into the LLC, here is how we are thinking about it:Asset contribution value to LLC = $175,000Refinance (75% of $200,000) = $150,000Payoff old mortgage = $125,000Money to seller = $25,000Remaining seller equity in the LLC (to be paid out in an agreed upon time frame, 5yrs?)

From the 1031 view point, if you hold back $60K to use for improvements that amount will be taxable. 

(if he wants to control when earnings are repatriated to Canada, then he's looking at incorporating an entity in the U.S.)The best advice for him is to jot down his situation and objectives in point form, then find both and accountant and attorney who have cross-boarder business and real estate experience and spend a few hundred dollars to find an ownership structure which fits his immediate needs, but that will grow with him, or can easily be transformed to meet is longer term objectives without creating a nightmare of taxable events.

Moreover, it sound like you live pretty close to the property, so you might even be able to cut that number down by doing some of the repair and maintenance yourself.I would look concretely at what the taxes would be upon a sale (it looks like you're a realtor so check out what the current taxable value is on the property by looking at the public record), speak with an insurance agent about what they might charge for a premium on this property, and gauge how many repairs you would need to do in the next 1-5 years.That's where I would start if I were looking into this deal.  

@Dave Foster Many people are unaware that they can also 1031 into a trust instead of a physical property... so in the event that the "like kind" property exchange is not going to go through, they can defer paying taxes by moving the taxable income into a trust. 

@Roman Capone, any money you take out of a 1031 exchange is going to be considered profit and will be taxable.  

Any reduction in debt or cash received may be treated as taxable boot, resulting in potential tax liabilities.

Here's the quick math:$1,300,000 (Sale Price) - $130,000 (Sales costs 10% of sale price conservatively) = $1,170,000 net$1,170,000 (net sale proceeds) - $550,000 (cost basis assuming no improvements) = $620,000 Capital Gains$620,000 (Gross Cap Gains) - $250,000 (Cap Gains waived for primary res) = $370,000 taxable cap gains$370,000 x 0.15 = $55,500 cap gains taxes owed$620,000 (capital gains not including original equity in the home from downpayment and principal payments over 5 years) - $55,500 (cap gains tax) = $565,000 That $565,000 number is the apples to apples number that you want to make sure you're getting the best return you can from. $2,500 monthly rent (not subtracting monthly expenses and mortgage payments yet) is $30,000 annually which is 5.3% return.

The 28% tax bracket seems high if your taxable income was negative last year.