Thursday, January 26, 2012
LLP versus LLLP - More information
A reader sent me this link. I found it quite informative. Thanks Rob! http://www.hatcherstubbs.com/documents/BRC-ArticleLLPorLLLP.PDF
Sunday, January 15, 2012
Currency Conversion - New Contact
I met a new contact at the Calgary HomExpo show:
Annelies van der Made
Private Client Manager/Trader
Firma Foreign Exchange
303-10310 Jasper Avenue
Edmonton, Alberta T5J1Y8
(780)423-2217
1(877)423-2217
www.firmafx.com
She/they do "wholesale" currency transactions of at least $10,000 (although they can do less than $10K in the case of ernest money).
From the discussion, it sounds like they may be as convenient as an online service, and potentially have even more agressive (i.e. low) rate spreads between mid-market rates we see published versus what you actually experience in a transaction. Agressive rates are important when you start looking at transferring enough for a purchase price. If you save 1-2% on $100K, for example, that's a $1-2000 saving.
Annelies van der Made
Private Client Manager/Trader
Firma Foreign Exchange
303-10310 Jasper Avenue
Edmonton, Alberta T5J1Y8
(780)423-2217
1(877)423-2217
www.firmafx.com
She/they do "wholesale" currency transactions of at least $10,000 (although they can do less than $10K in the case of ernest money).
From the discussion, it sounds like they may be as convenient as an online service, and potentially have even more agressive (i.e. low) rate spreads between mid-market rates we see published versus what you actually experience in a transaction. Agressive rates are important when you start looking at transferring enough for a purchase price. If you save 1-2% on $100K, for example, that's a $1-2000 saving.
Friday, January 13, 2012
HomExpo and Seminar in Calgary this weekend
For anyone interested, Jeff and Dave from RealCore and HousingAngels are in Calgary this weekend (Friday Jan 13th - Sunday Jan 15th 2012) for the HomExpo show. They are also offering a more detailed seminar on Monday (January 16th) evening at the Blackfoot Inn. I have been asked to speak at the seminar, and will be sharing experiences to date. If you are interested, you can register through the RealCoreRealty.com or HousingAngels.com websites. I believe there is a "client appreciation event" afterwards and you can get in on that by registering for that as well. There are two separate entries under Seminars.
This is the seminar that first convinced Brenda and I to "go for it". Most of the other seminars we had attended caused interest but didn't have enough meat to answer key questions.
This is the seminar that first convinced Brenda and I to "go for it". Most of the other seminars we had attended caused interest but didn't have enough meat to answer key questions.
Monday, January 9, 2012
LLP or LLLP?
A few readers have asked whether an LLP or an LLLP is the better choice for holding and renting property. Limited Liability Partnership versus Limited Liability Limited Partnership. I am no expert on the differentiation.
We chose LLPs. Our reasoning at the time was that we were trying to provide liability protection for the partners (in this case a couple) as a group rather than protection for the "limited liability partner" from actions of the "general partner". We wanted both partners to be involved and agreeing on partnership decisions, rather than one partner managing the activities and the other being a silent investor.
Here is a site that discusses the options: http://www.referenceforbusiness.com/encyclopedia/Oli-Per/Partnerships.html#b
Any experts out there that can comment?
We chose LLPs. Our reasoning at the time was that we were trying to provide liability protection for the partners (in this case a couple) as a group rather than protection for the "limited liability partner" from actions of the "general partner". We wanted both partners to be involved and agreeing on partnership decisions, rather than one partner managing the activities and the other being a silent investor.
Here is a site that discusses the options: http://www.referenceforbusiness.com/encyclopedia/Oli-Per/Partnerships.html#b
Any experts out there that can comment?
US Tax Software
In preparation for tax time, I have looked briefly at available tax software. Personally I struggle with spending a lot of money on accounting services to file a tax return, but of course if you are going down that path you will have no need for tax software. For those that plan to file their own taxes, and who have leveraged LLPs to hold properties, here are some thoughts.
Required support for forms: LLPs file a 1065 return, and put the details of rental income and expenses on an attached 8825 form. Depreciation is calculated on an attached 4562 form. The output of the LLP's 1065 return is a K1 slip for each of the partners. The partners then file 1040-NR individual returns and take the K1 slips as input. So...the full job includes 1065, 8825, and 4562 forms for the LLP; and 1040NR forms for the individuals.
To date I have not found any reasonable (e.g. say under $100) software that handles all of those requirements. Only professional tax filer software which is far too expensive.
Looking at it closer, the complexity is not terribly high, but to the extent that it exists it's mostly with the LLP. The individual 1040NRs can easily be done using downloaded manual 1040NR tax return forms. If I then remove the 1040NR form from the software "requirements list", then there are some solutions.
As in previous years I settled on H&R Block Home Business as a software package to do the LLP 1065 returns. I still find the user interface more difficult than it needs to be, and more difficult than say TurboTax for Canadian Individual Tax Returns. But for me it's better than filling out manual forms for the 1065s. It helps calculate and track depreciation for example. It can also be used for a few LLP returns with only one purchase.
If you want to pursue the H&R Block software, there are online coupons that can save some money. I found one for 20% off and paid about $65 USD. Here's another link that I saw last night. http://www.hrblock.com/tax-software/premium-business.html?otpPartnerID=7825&campaignId=af_mcm_7825_0001&AID=10986834&PID=5459327
If you have different/better suggestions, please attach them as comments for other readers. Thanks.
Required support for forms: LLPs file a 1065 return, and put the details of rental income and expenses on an attached 8825 form. Depreciation is calculated on an attached 4562 form. The output of the LLP's 1065 return is a K1 slip for each of the partners. The partners then file 1040-NR individual returns and take the K1 slips as input. So...the full job includes 1065, 8825, and 4562 forms for the LLP; and 1040NR forms for the individuals.
To date I have not found any reasonable (e.g. say under $100) software that handles all of those requirements. Only professional tax filer software which is far too expensive.
Looking at it closer, the complexity is not terribly high, but to the extent that it exists it's mostly with the LLP. The individual 1040NRs can easily be done using downloaded manual 1040NR tax return forms. If I then remove the 1040NR form from the software "requirements list", then there are some solutions.
As in previous years I settled on H&R Block Home Business as a software package to do the LLP 1065 returns. I still find the user interface more difficult than it needs to be, and more difficult than say TurboTax for Canadian Individual Tax Returns. But for me it's better than filling out manual forms for the 1065s. It helps calculate and track depreciation for example. It can also be used for a few LLP returns with only one purchase.
If you want to pursue the H&R Block software, there are online coupons that can save some money. I found one for 20% off and paid about $65 USD. Here's another link that I saw last night. http://www.hrblock.com/tax-software/premium-business.html?otpPartnerID=7825&campaignId=af_mcm_7825_0001&AID=10986834&PID=5459327
If you have different/better suggestions, please attach them as comments for other readers. Thanks.
Thursday, January 5, 2012
Financing a Property
Several readers have asked how best to finance a property: mortgage or otherwise. Here are some considerations:
Interest on a mortgage is a legitimate expense against rental income but according to the IRS web site, only if the loan (mortgage) is registered against the property. Therefore, if you need to borrow money to finance the property, and this was the only consideration, you would likely choose to go with a mortgage backed by the property.
However, at least when we were looking, we found that interest rates on US mortgages were considerably higher than what we could achieve on a home equity line of credit in Canada. So, yes, a US mortgage would be deductible against US rental income, but even assuming we were making enough "profit" to have to pay US tax (unlikely in the short term), the after tax rate would still be about the same as what we would pay on a home equity line of credit in Canada.
Further, since sellers greatly prefer cash deals to those contingent on financing we could achieve a lower purchase that way. Maybe a couple of percent. Maybe even 5%.
Plus, a US mortgage may require "origination points": an up front fee to cover administration costs.
Overall, we decided that, at least in our case, any required financing was better done through an existing home equity line of credit in Canada. Of course that means that you are borrowing in Canadian currency and need to convert and transfer the funds.
Transferring the funds will cost about 1.25% if you use a currency trading account such as XE.com, or a little more (1% more?) if you just use a bank.
And of course your opinion about whether the Canadian dollar will appreciate or depreciate against the US dollar is another consideration. Changes in the dollar valuation may have the largest effect. I just don't know how to predict it with any degree of accuracy. Currency traders get it wrong half of the time!
A more recent analysis may yield a different result. If you do want to pursue a US mortgage, a previous post provided by a reader provides contact information for Washington Federal and they do currently offer US mortgages to Canadians. Many lenders do not.
Interest on a mortgage is a legitimate expense against rental income but according to the IRS web site, only if the loan (mortgage) is registered against the property. Therefore, if you need to borrow money to finance the property, and this was the only consideration, you would likely choose to go with a mortgage backed by the property.
However, at least when we were looking, we found that interest rates on US mortgages were considerably higher than what we could achieve on a home equity line of credit in Canada. So, yes, a US mortgage would be deductible against US rental income, but even assuming we were making enough "profit" to have to pay US tax (unlikely in the short term), the after tax rate would still be about the same as what we would pay on a home equity line of credit in Canada.
Further, since sellers greatly prefer cash deals to those contingent on financing we could achieve a lower purchase that way. Maybe a couple of percent. Maybe even 5%.
Plus, a US mortgage may require "origination points": an up front fee to cover administration costs.
Overall, we decided that, at least in our case, any required financing was better done through an existing home equity line of credit in Canada. Of course that means that you are borrowing in Canadian currency and need to convert and transfer the funds.
Transferring the funds will cost about 1.25% if you use a currency trading account such as XE.com, or a little more (1% more?) if you just use a bank.
And of course your opinion about whether the Canadian dollar will appreciate or depreciate against the US dollar is another consideration. Changes in the dollar valuation may have the largest effect. I just don't know how to predict it with any degree of accuracy. Currency traders get it wrong half of the time!
A more recent analysis may yield a different result. If you do want to pursue a US mortgage, a previous post provided by a reader provides contact information for Washington Federal and they do currently offer US mortgages to Canadians. Many lenders do not.
Tuesday, January 3, 2012
Annual Reports for LLPs
Happy New Year!
You know what that means, right? Right! For those of us holding properties in Arizona LLPs, it's time to file the Annual Reports.
For each LLP, a simple one-page "Annual Report" that is available on the azsos.gov website must be filed between January 1 and April 30 every year. It just reaffirms the name and address of the "Agent for Service of Process" and the address of the "chief executive office" used by the LLP (if any). You send two copies of the form along with a cheque for $3 and a self stamped/addressed envelope to the AZSOS for filing. Pretty simple. Just something that has to be done to keep on the good side of the Secretary of State. Note: late filings attract a $25 penalty.
Interesting side-note: A notice on the azsos.gov web site says that when setting up an LLP, while you still need to publish the the statement of qualification for 3 consecutive publications of a newspaper, you no longer have to file proof of doing so. That's good. One less step when setting up an LLP. By the way, you did publish your SOQ right? If not, it might be a good idea to tidy that up.
For each LLP, a simple one-page "Annual Report" that is available on the azsos.gov website must be filed between January 1 and April 30 every year. It just reaffirms the name and address of the "Agent for Service of Process" and the address of the "chief executive office" used by the LLP (if any). You send two copies of the form along with a cheque for $3 and a self stamped/addressed envelope to the AZSOS for filing. Pretty simple. Just something that has to be done to keep on the good side of the Secretary of State. Note: late filings attract a $25 penalty.
Interesting side-note: A notice on the azsos.gov web site says that when setting up an LLP, while you still need to publish the the statement of qualification for 3 consecutive publications of a newspaper, you no longer have to file proof of doing so. That's good. One less step when setting up an LLP. By the way, you did publish your SOQ right? If not, it might be a good idea to tidy that up.
Saturday, November 5, 2011
Estate Planning & LLPs
If you have been following this blog, you know that we settled on LLPs to hold our properties. See past posts for the reasoning and discussion of alternatives such as just relying on insurance. Others have a different view. A recent email from a blog reader (thank you) provided this link:
http://www.altrolaw.com/
If you read through the material on the site, you will find reference to a book by David A. Altro called "Owning US Property The Canadian Way", and reference to an article he has published in STEP Journal: http://www.stepjournal.org/journal_archive/2011/step_journal_september_2011/southern_comfort.aspx?link=contentMiddle%20contentMiddleWide.
I have read the book as well as the article. I encourage you to read the online article which really sums up what is in the book. The main point is that owning US property personally or in an LLP leaves you open to estate taxes that can be expensive. David goes on to suggest something called a Cross Border Trust (CBT) that can help in that regard. Basically he doesn't recommend an LLP. I tried a few searches on Cross Border Trusts and did not find any independent sources, so I gather that the recommended CBT approach is a combination of other standard constructs given a name...which does not invalidate the approach.
He may have a point, and there could be merit in his CBT approach. I am telling you about it so you can reach your own conclusions. For me, I would have to engage the author directly to determine the costs and relative pros/cons of the CBT approach before reaching any conclusion. I probably will not be doing that because for our personal situation I do not believe (maybe wrongly) that the estate tax issue will be serious if one of us dies before we unwind US investments.
My basic assumption is that more complex mechanisms cost more to set up and maintain. I am much more afraid of confused tax authorities than I am of working through estate taxes. When tax authorities get confused, they can just assess whatever tax they want and it's up to you to convince them otherwise. Please do not let my conclusion (which could change) sway you. I would be very happy to hear about analysis that draws a different conclusion...if it is based on research and facts rather than fear of a general "you may be subject to costly estate tax". Please do let me know if you have investigated CBTs or other strategies and believe they are affordable and handle the estate tax risk better for average investors.
If you read through the material on the site, you will find reference to a book by David A. Altro called "Owning US Property The Canadian Way", and reference to an article he has published in STEP Journal: http://www.stepjournal.org/journal_archive/2011/step_journal_september_2011/southern_comfort.aspx?link=contentMiddle%20contentMiddleWide.
I have read the book as well as the article. I encourage you to read the online article which really sums up what is in the book. The main point is that owning US property personally or in an LLP leaves you open to estate taxes that can be expensive. David goes on to suggest something called a Cross Border Trust (CBT) that can help in that regard. Basically he doesn't recommend an LLP. I tried a few searches on Cross Border Trusts and did not find any independent sources, so I gather that the recommended CBT approach is a combination of other standard constructs given a name...which does not invalidate the approach.
He may have a point, and there could be merit in his CBT approach. I am telling you about it so you can reach your own conclusions. For me, I would have to engage the author directly to determine the costs and relative pros/cons of the CBT approach before reaching any conclusion. I probably will not be doing that because for our personal situation I do not believe (maybe wrongly) that the estate tax issue will be serious if one of us dies before we unwind US investments.
My basic assumption is that more complex mechanisms cost more to set up and maintain. I am much more afraid of confused tax authorities than I am of working through estate taxes. When tax authorities get confused, they can just assess whatever tax they want and it's up to you to convince them otherwise. Please do not let my conclusion (which could change) sway you. I would be very happy to hear about analysis that draws a different conclusion...if it is based on research and facts rather than fear of a general "you may be subject to costly estate tax". Please do let me know if you have investigated CBTs or other strategies and believe they are affordable and handle the estate tax risk better for average investors.
Estate Tax Exemption
OK, you have forced me into it. I have tried to avoid the topic of estate planning because it is complex and research never quite gets me to the bottom of it. But I do get a lot of mail on the topic, and many are concerned (rightly) about tax implications if a co-owner or owner dies. The reason this is complicated is that it is under constant evolution. Under Bush-era tax law, estate taxes were declining through yearly increases in the estate tax exemption to the year 2010. At the end of 2010, the tax law that provided for the increasing exemption expired, potentially defaulting back to earlier tax law with very high estate taxes. At the last minute (December 2010), the US passed the "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Tax Relief Act)" which essentially extended and increased exemptions to estate taxes for two years (2011 and 2012). We will have to see what happens then.
Anyway, the nominal amount of the exemption for estate taxes (which has now been combined with gift taxes) is $5M. Great! So no estate tax on the first $5M? Well, not so fast. My understanding of it through additional digging is that for Canadians the unified exemption is prorated based on the ratio of US assets to Canadian Assets.
So, if you have $4m of assets in total, and your US assets (say a house) are $128,000, then the exemption would be 128,000 / 4,000,000 x $5,000,000 or $160,000 and your estate may pay up to 35% of the remainder...so $40,000 x 35% on that $128K property.
For a smaller worldwide asset base...say $2m, with $200k of US property, the exemption would be 200,000 / 2,000,000 x $5m = $500k exemption.
Therefore, your actual exemption would be based on your personal estate value and location. For many, there might not be any estate tax. Others might not be so lucky. But I don't believe it is the earth shattering disaster that many articles would have us believe.
Otherwise, there could be "probate" fees, which I would guess varies by state. I don't believe Arizona has probate fees.
I am no expert on this, just a reader like you. So please check out the Tax Relief Act of 2010 and draw your own conclusions. See above for the full name of the act.
Anyway, the nominal amount of the exemption for estate taxes (which has now been combined with gift taxes) is $5M. Great! So no estate tax on the first $5M? Well, not so fast. My understanding of it through additional digging is that for Canadians the unified exemption is prorated based on the ratio of US assets to Canadian Assets.
So, if you have $4m of assets in total, and your US assets (say a house) are $128,000, then the exemption would be 128,000 / 4,000,000 x $5,000,000 or $160,000 and your estate may pay up to 35% of the remainder...so $40,000 x 35% on that $128K property.
For a smaller worldwide asset base...say $2m, with $200k of US property, the exemption would be 200,000 / 2,000,000 x $5m = $500k exemption.
Therefore, your actual exemption would be based on your personal estate value and location. For many, there might not be any estate tax. Others might not be so lucky. But I don't believe it is the earth shattering disaster that many articles would have us believe.
Otherwise, there could be "probate" fees, which I would guess varies by state. I don't believe Arizona has probate fees.
I am no expert on this, just a reader like you. So please check out the Tax Relief Act of 2010 and draw your own conclusions. See above for the full name of the act.
S.1746 VISIT-USA Act
Two US Senators proposed the "Visa Improvements to Stimulate Tourism to the United States of America" (VISIT USA) Act. The text can be found at http://www.govtrack.us/congress/bill.xpd?bill=s112-1746.
The main intent is to encourage increased investment from "non resident aliens".
There are 8 sections to the proposal excluding "section 1" which just introduces the "VISIT USA" short name for the act. At least two sections are aimed at Canadians. Section 5 (Encouraging Canadian Tourism) provides for 3 year visas for Canadians over 50 that allow stays of up to 240 days. And, Section 8 (Increasing Home Ownership by Priority Visitors) provides for 3 year visas that do not have a 240 day limit, but require investment in real estate of at least $500K including a minimum $250K residence.
This is an interesting development, but it remains to be seen how beneficial it will be. Section 8 details in particular requires the individual to pay US Taxes; and requires a minimum $250K residence which is a pretty fancy house in Phoenix right now. Neither visa provides any other benefits such as the ability to work in the US, fast-tracking of a green card, or access to social programs. Then of course, there are the Canadian impacts of being outside the country for more than 180 days. Something to keep an eye on anyway.
The main intent is to encourage increased investment from "non resident aliens".
There are 8 sections to the proposal excluding "section 1" which just introduces the "VISIT USA" short name for the act. At least two sections are aimed at Canadians. Section 5 (Encouraging Canadian Tourism) provides for 3 year visas for Canadians over 50 that allow stays of up to 240 days. And, Section 8 (Increasing Home Ownership by Priority Visitors) provides for 3 year visas that do not have a 240 day limit, but require investment in real estate of at least $500K including a minimum $250K residence.
This is an interesting development, but it remains to be seen how beneficial it will be. Section 8 details in particular requires the individual to pay US Taxes; and requires a minimum $250K residence which is a pretty fancy house in Phoenix right now. Neither visa provides any other benefits such as the ability to work in the US, fast-tracking of a green card, or access to social programs. Then of course, there are the Canadian impacts of being outside the country for more than 180 days. Something to keep an eye on anyway.
Washington Federal Financing Update
Here are some highlights of the financing available from Washington Federal sent in by a reader who followed up on the previous post. (Thank you.)
- Single family residences only (no multi-family, condos, condo conversions, town homes, manufactured homes)
- Minimum load amount $50,000; Maximum is $500,000
- 30 year fixed rate
- Loan to value 65% or less (i.e. 35% down payment)
- Available for both "second homes" and "investment loans", with some differences in the details.
Call Washington Federal for details. I have no relationship with Washington Federal or further information.
- Single family residences only (no multi-family, condos, condo conversions, town homes, manufactured homes)
- Minimum load amount $50,000; Maximum is $500,000
- 30 year fixed rate
- Loan to value 65% or less (i.e. 35% down payment)
- Available for both "second homes" and "investment loans", with some differences in the details.
Call Washington Federal for details. I have no relationship with Washington Federal or further information.
Monday, October 3, 2011
Financing
Here is a tip from a blog reader. I have no personal experience with this but apparently Washington Federal is able to offer financing for Canadian Investors purchasing US Real Estate. Contact information is:
Jamie Cordova
Branch Manager
Washington Federal
NMLSR #560554
Glendale Branch
6895 W. Bell Rd. Glendale, AZ 85308
Office: 623-334-9724
Fax: 623-334-1689
jamie.cordova@washingtonfederal.com
Thanks Dillon! And thanks Jamie for granting permission to pass on your contact information.
Jamie Cordova
Branch Manager
Washington Federal
NMLSR #560554
Glendale Branch
6895 W. Bell Rd. Glendale, AZ 85308
Office: 623-334-9724
Fax: 623-334-1689
jamie.cordova@washingtonfederal.com
Thanks Dillon! And thanks Jamie for granting permission to pass on your contact information.
Wednesday, August 3, 2011
Insurance
Don't forget about house insurance. Specifically landlord insurance if you are renting it out.
When we purchased the second property, we changed to State Farm because they were able to offer $2M liability and at a slightly lower premium than for $500K at our previous insurance company.
Katie Campbell (623)815-8170
katie.campbell.hg60@statefarm.com.
We have been happy so far. No hassle at all to clone the coverage for the third house.
If you go there, please tell her Gord Stevenson referred you. Last time someone mentioned that I had referred them, she sent us a $10 gift card. Unexpected, but nice. Thank you. :-)
Once we get the house moved to the LLP, and bank account finalized, we will ask State Farm to put the LLP's name on the policy, and take any further payments from the LLP's bank account.
When we purchased the second property, we changed to State Farm because they were able to offer $2M liability and at a slightly lower premium than for $500K at our previous insurance company.
Katie Campbell (623)815-8170
katie.campbell.hg60@statefarm.com.
We have been happy so far. No hassle at all to clone the coverage for the third house.
If you go there, please tell her Gord Stevenson referred you. Last time someone mentioned that I had referred them, she sent us a $10 gift card. Unexpected, but nice. Thank you. :-)
Once we get the house moved to the LLP, and bank account finalized, we will ask State Farm to put the LLP's name on the policy, and take any further payments from the LLP's bank account.
Registering the property under the LLP
Assuming the offer and closing was done under your own names, how does the property get moved under the LLP?
Well, there is a form. There would be. :-) It's called a "Quit Claim" deed. Samples can probably be found on the Maricopa County Recorder's site.
The Quit Claim Deed needs to be sent to the Maricopa County Recorder's office, along with a fee of $10. Maricopa County Recorder:j 111 S. Third Ave, Phoenix, Az, 85003. (602)506-3535.
This time we will submit the Quit Claim Deed ourselves. In the past we have had someone (Title Company or a local Paralegal) do it for us. I assume we will need to send two notarized copies of the Quit Claim Deed along with a self addressed, self stamped envelope.
Here is a link to a sample Quit Claim deed...the one that we used to transfer our first property from the LLC (after we figured out that approach had some risk) to the LLP. http://recorder.maricopa.gov/recdocdata/GetRecDataDetail.aspx?rec=20091131451&suf=
For this purpose the Quit Claim deed would be from our individual names to the LLP, instead of from an LLC to the LLP.
Update November 5: Two things: (1) The Quit Claim form needs to be notarized. We were going to be in the US in late August anyway, so we took the form with us and had it notarized at a US bank. It was convenient and inexpensive ($6) and avoided the risk of being rejected because of a lack of recognition of a Canadian "Commissioner of Oaths" or a Canadian notary. (2) Sending two notarized copies of the form to the the Recorder was a mistake: They sent it back saying "you sent two forms and included only one fee". Sigh. So I removed one copy of the form and sent it back. They recorded it and sent me back the form. My mistake. I guess they don't need to keep a copy. Anyway, the do-it-yourself Quit Claim approach was successful. It took a couple of weeks to be viewable on the web, but I can see the property is now registered to the LLP.
Well, there is a form. There would be. :-) It's called a "Quit Claim" deed. Samples can probably be found on the Maricopa County Recorder's site.
The Quit Claim Deed needs to be sent to the Maricopa County Recorder's office, along with a fee of $10. Maricopa County Recorder:j 111 S. Third Ave, Phoenix, Az, 85003. (602)506-3535.
This time we will submit the Quit Claim Deed ourselves. In the past we have had someone (Title Company or a local Paralegal) do it for us. I assume we will need to send two notarized copies of the Quit Claim Deed along with a self addressed, self stamped envelope.
Here is a link to a sample Quit Claim deed...the one that we used to transfer our first property from the LLC (after we figured out that approach had some risk) to the LLP. http://recorder.maricopa.gov/recdocdata/GetRecDataDetail.aspx?rec=20091131451&suf=
For this purpose the Quit Claim deed would be from our individual names to the LLP, instead of from an LLC to the LLP.
Update November 5: Two things: (1) The Quit Claim form needs to be notarized. We were going to be in the US in late August anyway, so we took the form with us and had it notarized at a US bank. It was convenient and inexpensive ($6) and avoided the risk of being rejected because of a lack of recognition of a Canadian "Commissioner of Oaths" or a Canadian notary. (2) Sending two notarized copies of the form to the the Recorder was a mistake: They sent it back saying "you sent two forms and included only one fee". Sigh. So I removed one copy of the form and sent it back. They recorded it and sent me back the form. My mistake. I guess they don't need to keep a copy. Anyway, the do-it-yourself Quit Claim approach was successful. It took a couple of weeks to be viewable on the web, but I can see the property is now registered to the LLP.
Bank Account
As mentioned earlier, we like to maintain separate finances for each LLP. Separate businesses, separate finances.
We continue to have good luck with Midfirst Bank. Personal and business accounts can be had for free. Sure, extra services cost something. Buying cheques; sending/receiving wires; "bill pay" (if you need that). But you can have a basic chequing account with debit cards that double as Visa credit cards...for free.
I have heard that the only good alternative among Canadian banks is Royal Bank. They have a US arm and can set up Canadian and US accounts where you can transfer money back and forth. We have no experience with them.
Midfirst is able to set up bank accounts without a US address. The first time there was a bit of confusion about that, and there was some trouble getting by one of the steps in the process. But ultimately they were successful. I believe they used the Bank branch's own address at one point in the process. That was handy too because when we use the debit card at a US gas station, the bank's Zip code works.
We continue to have good luck with Midfirst Bank. Personal and business accounts can be had for free. Sure, extra services cost something. Buying cheques; sending/receiving wires; "bill pay" (if you need that). But you can have a basic chequing account with debit cards that double as Visa credit cards...for free.
I have heard that the only good alternative among Canadian banks is Royal Bank. They have a US arm and can set up Canadian and US accounts where you can transfer money back and forth. We have no experience with them.
Midfirst is able to set up bank accounts without a US address. The first time there was a bit of confusion about that, and there was some trouble getting by one of the steps in the process. But ultimately they were successful. I believe they used the Bank branch's own address at one point in the process. That was handy too because when we use the debit card at a US gas station, the bank's Zip code works.
EIN for the LLP?
OK, here's a difference. The phone number for the special IRS service to set up EIN numbers for foreigners has changed. (267)-941-1099. They basically walk you through the SS-4 application form that can be found on the IRS website, and give you the EIN at the end of the call. Unbelievable. Imagine that happening in Canada.
Another important outcome is the name of the form that you should fill out at tax time for this LLP. It should be a 1065. If it is not, then go back and figure out which answer you gave them that drove a different outcome and try a different answer until you get 1065 as the outcome. This is the correct form for LLPs (and LLCs for that matter) being used for holding/renting property.
The IRS will follow up the call with a letter confirming the EIN and indication that you should fill out a 1065 at tax time. Keep that letter for the LLP files.
Oh yes, why do you want an EIN in the first place? (a) You need it to open a bank account for the LLP; and (b) you need it to annually file the 1065 tax form for the LLP. Somewhere along the way they will ask that question in the phone call...why do you need an EIN? The magic words are "to get a bank account".
Another important outcome is the name of the form that you should fill out at tax time for this LLP. It should be a 1065. If it is not, then go back and figure out which answer you gave them that drove a different outcome and try a different answer until you get 1065 as the outcome. This is the correct form for LLPs (and LLCs for that matter) being used for holding/renting property.
The IRS will follow up the call with a letter confirming the EIN and indication that you should fill out a 1065 at tax time. Keep that letter for the LLP files.
Oh yes, why do you want an EIN in the first place? (a) You need it to open a bank account for the LLP; and (b) you need it to annually file the 1065 tax form for the LLP. Somewhere along the way they will ask that question in the phone call...why do you need an EIN? The magic words are "to get a bank account".
LLP Set Up - Logistics
Anything new on setting up an LLP? Nope.
- Go to the Arizona Secretary of State web site: http://www.azsos.gov/
- Under Business Filings/Partnerships, do a search to check whether your LLP name is already used.
- Under Business Filings/Partnerships/Forms, select "Statement of Qualification for Conversion (LP not already on file with this office)".
- Fill out the form...send two copies, along with a self addressed, self stamped envelope to the AZSOS.
- They file the registration, stamp a copy and mail it back to you.
- You then need to "publish" the Statement of Qualifications in 3 consecutive issues of a publication. We used Record Reporter (a Daily Journal publication) at http://www.recordreporter.com/. Cost about $40. They mail back a confirmation that it was done. Make sure they know it is an LLP and not an LLC.
- File the confirmation with the AZSOS to complete the LLP setup. The Record Reporter says they will file a copy with the AZ government. But they are used to dealing with LLC's which are filed with a different department. We will see how it works out this time. If they do successfully file it with the AZSOS, great. But I will check and file it myself if not.
Tricky bits?
- What goes in what field on the form. You can probably do a search and find one on the AZSOS site as a sample.
- And...you need a "process agent" with a local (Arizona) address. What the... Jeff!!! Did I mention that he was helpful? The alternative is a paid service that some paralegals or lawyers offer.
- Go to the Arizona Secretary of State web site: http://www.azsos.gov/
- Under Business Filings/Partnerships, do a search to check whether your LLP name is already used.
- Under Business Filings/Partnerships/Forms, select "Statement of Qualification for Conversion (LP not already on file with this office)".
- Fill out the form...send two copies, along with a self addressed, self stamped envelope to the AZSOS.
- They file the registration, stamp a copy and mail it back to you.
- You then need to "publish" the Statement of Qualifications in 3 consecutive issues of a publication. We used Record Reporter (a Daily Journal publication) at http://www.recordreporter.com/. Cost about $40. They mail back a confirmation that it was done. Make sure they know it is an LLP and not an LLC.
- File the confirmation with the AZSOS to complete the LLP setup. The Record Reporter says they will file a copy with the AZ government. But they are used to dealing with LLC's which are filed with a different department. We will see how it works out this time. If they do successfully file it with the AZSOS, great. But I will check and file it myself if not.
Tricky bits?
- What goes in what field on the form. You can probably do a search and find one on the AZSOS site as a sample.
- And...you need a "process agent" with a local (Arizona) address. What the... Jeff!!! Did I mention that he was helpful? The alternative is a paid service that some paralegals or lawyers offer.
Currency Conversion - Revisited
When we bought the first property, we used Custom House...a currency exchange company. That worked well. Later they were acquired by Western Union, but I assume it still works pretty much the same way.
Since then, another option has become available: online currency exchange accounts.
We have set up an account with XE.COM, which I believe is run by Custom House. The account can be set up online, although there are steps (as you can imagine) where you need to scan/send them copies of supporting documents to prove you are who are say you are. It probably took a week or so to get it completed.
You link your Canadian and US bank accounts to the XE account. Then, when you want to transfer funds, you log on to XE, get a quote, and initiate the transaction online. Funds can be taken from your source account by EFT, or by Wire (which turns out to be an alias for "bill pay"); and they can be deposited to the target account by EFT or by Wire (which really does mean wire).
That's what we did for this property. The only hassle was a limit of $10K for EFT transactions...which I believe is actually a source bank limitation. We probably could have gone through steps to change the limit, but we just transferred the cash in $10K increments over a few weeks...which also meant some smoothing of the exchange rate.
Speaking of exchange rate...I don't know what the actual algorithm is, but it felt like we were paying about 1.2 or 1.3% for currency conversion using XE. I believe the banks are 2-2.5%.
If you don't have a US bank account, you could probably wire directly from the XE account directly to the Title company.
Since then, another option has become available: online currency exchange accounts.
We have set up an account with XE.COM, which I believe is run by Custom House. The account can be set up online, although there are steps (as you can imagine) where you need to scan/send them copies of supporting documents to prove you are who are say you are. It probably took a week or so to get it completed.
You link your Canadian and US bank accounts to the XE account. Then, when you want to transfer funds, you log on to XE, get a quote, and initiate the transaction online. Funds can be taken from your source account by EFT, or by Wire (which turns out to be an alias for "bill pay"); and they can be deposited to the target account by EFT or by Wire (which really does mean wire).
That's what we did for this property. The only hassle was a limit of $10K for EFT transactions...which I believe is actually a source bank limitation. We probably could have gone through steps to change the limit, but we just transferred the cash in $10K increments over a few weeks...which also meant some smoothing of the exchange rate.
Speaking of exchange rate...I don't know what the actual algorithm is, but it felt like we were paying about 1.2 or 1.3% for currency conversion using XE. I believe the banks are 2-2.5%.
If you don't have a US bank account, you could probably wire directly from the XE account directly to the Title company.
Jeff Dicks - Still the right Real Estate Pro?
We have been working with Jeff since January 2009, and he has continued to be there for us at every turn. He has literally saved us $1000's when we consider purchase price, efficiency in finding renters, dealing with issues at much less cost than we could have, etc.
When systemic issues have come up...such as the cities wanting rental taxes...he put in place an accountant to take care of that for us (and all his clients) instead of us having to file monthly taxes with the cities for each property.
And he's good at finding properties.
So yes, that decision stands. He sold us the third property.
Jeff's main search website is findhomesfromhome.com. I also suggest that if you are interested, ask him to add you to the "Jeff's deal of the week" distribution list.
Jeff@realcorerealty.com
When systemic issues have come up...such as the cities wanting rental taxes...he put in place an accountant to take care of that for us (and all his clients) instead of us having to file monthly taxes with the cities for each property.
And he's good at finding properties.
So yes, that decision stands. He sold us the third property.
Jeff's main search website is findhomesfromhome.com. I also suggest that if you are interested, ask him to add you to the "Jeff's deal of the week" distribution list.
Jeff@realcorerealty.com
LLP still the way to go?
Well, we did it again. With the strong Canadian dollar, and depressed housing prices, we bought another property in Phoenix. Another single family residential property that we will be renting out.
This provides an opportunity to revisit learnings from the past and see if some should be updated, so you will see a few new posts as a result.
Let's start with the decision to use an LLP. The previous reasoning for holding the property in an LLP was that (a) an LLP provides extra liability protection in the same way that an LLC does; and (b) an LLP should not be as prone to double taxation as we feared an LLC would be. (b) is because an LLC is taxed as an individual in the US, but Canada does not have an LLC construct so would probably see it as a corporation...and the tax agreement between the two countries does not allow personal tax paid in one country to be credited back against corporate tax due in the other. So, an LLP should be better from that perspective than an LLC, with the only drawback being that an LLP requires at least two "partners" while an LLC can have one "owner".
So...to today. That reasoning still holds. Therefore, if I want/need the additional liability protection, then an LLP seems to be the way to go. The question is...do I want/need the additional liability bad enough to put up with the extra administration work?
When we decided to go with LLPs previously the maximum liability insurance available from the insurance company we were referred to was $500K. Even by Canadian standards that is too low. Strangely, even with the reputation the US has as a very litigious country, $500K seemed to be the standard. Not good enough, so LLP. But later, we found that State Farm would offer $2M, so we switched. OK, is $2M enough? Probably for most circumstances. The LLP still offers the additional protection of isolating your other assets from any liabilities relating to this property. It becomes a game of probabilities. What's the probability of incurring a liability from a lawsuit over $500K? Whatever the answer is, the probability is significantly smaller if the number is $2M.
Conclusion: We're already down the path of using LLPs for the other two properties and we have to maintain the additional administration for those anyway. One more is a minor addition. So we will continue with the LLP approach for the third. If it were our first property, it would be a more interesting debate. Not sure which way we would go. For sure, the alternative would be holding the property in our own names, not an LLC.
This provides an opportunity to revisit learnings from the past and see if some should be updated, so you will see a few new posts as a result.
Let's start with the decision to use an LLP. The previous reasoning for holding the property in an LLP was that (a) an LLP provides extra liability protection in the same way that an LLC does; and (b) an LLP should not be as prone to double taxation as we feared an LLC would be. (b) is because an LLC is taxed as an individual in the US, but Canada does not have an LLC construct so would probably see it as a corporation...and the tax agreement between the two countries does not allow personal tax paid in one country to be credited back against corporate tax due in the other. So, an LLP should be better from that perspective than an LLC, with the only drawback being that an LLP requires at least two "partners" while an LLC can have one "owner".
So...to today. That reasoning still holds. Therefore, if I want/need the additional liability protection, then an LLP seems to be the way to go. The question is...do I want/need the additional liability bad enough to put up with the extra administration work?
When we decided to go with LLPs previously the maximum liability insurance available from the insurance company we were referred to was $500K. Even by Canadian standards that is too low. Strangely, even with the reputation the US has as a very litigious country, $500K seemed to be the standard. Not good enough, so LLP. But later, we found that State Farm would offer $2M, so we switched. OK, is $2M enough? Probably for most circumstances. The LLP still offers the additional protection of isolating your other assets from any liabilities relating to this property. It becomes a game of probabilities. What's the probability of incurring a liability from a lawsuit over $500K? Whatever the answer is, the probability is significantly smaller if the number is $2M.
Conclusion: We're already down the path of using LLPs for the other two properties and we have to maintain the additional administration for those anyway. One more is a minor addition. So we will continue with the LLP approach for the third. If it were our first property, it would be a more interesting debate. Not sure which way we would go. For sure, the alternative would be holding the property in our own names, not an LLC.
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