Considerations for structure Proper and flexible structure now… saves $ later• Everyone is different• Preparation and organization generate additional savings plus helps provide security
What should you think about?• Age of the investors • Value of the property• Number of investors • Investment strategy –• Income level of the single purchase vs. investors multiple purchases• Expected future • Source of funds for appreciation of the down payment property • Family situation• Risk tolerance of the investors
Tax and legal factors• Legal liability issues• Withholding tax• Income tax• Capital gains tax• Estate tax issues
Common ownership structures• Personal Ownership• Corporate Ownership• Limited Liability Partnership• Other
Personal ownershipAdvantages Disadvantages• Lower income and capital • Exposure to U.S. estate tax gains tax rates as compared • Unlimited personal legal to corporate tax rates. liability• Easiest to setup and administer
Corporate ownershipAdvantages Disadvantages• No U.S. estate tax on death. • Higher income tax rates• Limited personal liability. • Higher capital gains taxes on ultimate sale of property. • State corporate income taxes can be higher depending on the particular state. • Costly to setup in comparison to personal ownership U.S. C - corporation that is owned by a Canadian Holding Company
Limited Liability Partnership (“LLP”)Advantages Disadvantages• Income and capital gains are • Exposure to the estate tax taxed the same as personal • More costly to setup and ownership. administer in comparison to• Limited Liability to the personal ownership. individual owners. Property owned by the LLP. The partners of the LLP are the 1% General Partner, typically a C corporation or LLC, and the 99% Limited Partner, the individual taxpayer.
Legal liabilityPersonal ownership Corporate ownership• Unlimited legal liability • Limited legal liability• Is house insurance • No protection from adequate or enough? negligence U.S. is a more litigious country than Canada. Please note that we are NOT lawyers. Consult with your legal advisors for specific details.
Withholding taxes• 30% of gross rent income must be remitted to the US Treasury Department on a monthly basis by tenant or property if property owned by non- resident.• 30% withholding can be eliminated if the owners elects to treat income as “effectively connected income.” Income will be subject to graduated income tax rates.• Election made on first annual tax return.
Taxes, taxes, taxes Personal, corporate, capital gains, estate
Personal taxes…1• Income and expenses are reported on a 1040NR – U.S. Nonresident Alien Income Tax Return – plus any applicable state and local returns.• Personal tax returns and any income taxes owing due April 15th of the following year.• Canada-U.S. Tax Treaty grants automatic two month extension until June 15th. – Any taxes owing still due April 15th.
Range of federal tax rates > $373,000Personal taxes…2 (35%)• Income and expenses < $8375 will also be reported on (10%) the taxpayer Canadian Range of state tax rates Income Tax Return. 11% – Foreign Tax Credit will be available for U.S. taxes 5-9% - Majority of states paid.• Individual will need U.S. 0% ITIN.
Corporate taxes…1• Income and expenses are reported on Form 1120 – U.S. Corporate Income Tax Return plus any applicable state and local returns.• Federal Corporate tax returns due by the 15th of the third month after fiscal year-end.• State Corporate tax returns due by the 15th of the third or fourth month after fiscal year-end depending on state.
Corporate taxes…2Range of federal tax rates Range of state tax rates > $100,000 9.99% (39%) < $50,000 3% (15%)
Capital Gains Taxes• Personal long term (held for more than one year) federal capital gains rates 10% to 15%, plus applicable state tax rates.• Corporate capital gains tax rates same as income tax rates.• Significant savings if investment held personally
Estate tax• Probably the most complicated tax in the U.S.• Maximum estate tax rate is 35%.• Non residents are taxed on their U.S. value of their U.S. property.• The estate tax is prorated based on the value of taxpayers U.S. assets vs. the value of taxpayers worldwide assets.• Typically if the estate is setup properly, the estate tax may not apply until the death of the surviving spouse.
Canadian tax implications• Worldwide income• Tax treaty• Progress of legislation
Dube & Cuttini…Who are we? How we can help• Real estate investors • Save taxes• Real estate accountants • Structure assets• US and Canadian tax and business advisors • Protect investments• Working with clients across Canada and around the world Interested in an initial consultation? Contact us at: firstname.lastname@example.org or 1.877.475.3823
Connect with usDube & Cuttini George & Peter• www.dubecuttini.com • @petercuttini• @dubecuttini • @georgeEdube • www.georgeEdube.com
Disclaimer• This presentation contains general comments and should NOT be acted upon without the advice of a qualified tax professional. While there may be similarities, every situation is different.