I have mentioned in this blog that our properties are managed by National Rental Pros (NRP). This is changing, at least in name. With the passing of Jeff Dicks last year, the owners of the property management company (Dave and Heather Cook) have reorganized the business under the Desert Gallery Properties. They continue to manage our properties and the staff are the same. They are still doing well for us. Here is their web address: http://desertgalleryproperties.com.
Tuesday, December 29, 2015
It is that time of year again. Yes, Annual Report filing season if you are using an Arizona LLP to hold property. Every year the Arizona Secretary of State requires an updated "Annual Report" form to be submitted between January 1 and April 30. It is a one pager that provides address information for company location and for the "Agent for Service of Process Information" (aka Statutory Agent). It is $3 to file it on time, or $28 to file it late. It is mildly interesting that Corporations (rather than Partnerships) are administered by a different government department and do not require Annual Reports...only updates if there are changes.
Anyway, Happy New Year!
Anyway, Happy New Year!
Thursday, October 22, 2015
Kilpatrick & Co., CPAs
2158 N. Gilbert Road, Suite #107
Mesa, AZ 85203
nan at kilpatrickcpas.com
Friday, May 8, 2015
Here is information about his memorial tomorrow. If you are inclined to help, his kids need donations (see link below) much more than flowers. Thanks, Gord.
If you are getting this news for the first time my apologies as you can imagine we have been all working hard to get this event ready and the word out as quickly as possible. We are deeply sadden by the loss of Jeff and you are receiving this email because we know you cared about him. His celebration of life will be
Saturday May 9, 2015 10:00 AM to 1:00PM Pebble Creek Country Club 16222 Clubhouse Dr. Goodyear, AZ 85359 800-795-4663 www.pebblecreekhoa.org
Beach Attire, shorts and flip flops preferred, anyone with a suit and tie will be sent home! Please RSVP by Thursday so we can order food and drinks. Heather@desertgalleryproperties dot com.
We have set up a site for donations for his loved ones he left behind. https://www.crowdrise.com/jeffdickscelebrationoflife/fundraiser/housingangelscharityforjeffdicks
Donations will also be accepted by Housing Angels Charity and 100% of proceeds will be given to Jeff’s children.
Wednesday, December 31, 2014
In our case, the desire was a 50/50 partnership where Brenda and I have 50%, and our friend has 50%. We also wanted to manage the property and associated rentals as a business.
We set up a new Limited Liability Company (LLC) in Arizona, 50% owned by an existing LLP that my wife and I have; and 50% owned by an LLC that our friend already has. The new LLC is the sole beneficiary of the Mexican fidiecomiso. We will see if this stands up as the best solution over time, but the reasoning is as follows.
One legal entity (LLC) to manage the property
Possibility of transferring ownership by selling the LLC instead of changing the Mexican fidiecomiso when it comes time to sell
Liability is contained by the new LLC
Our LLP and our friend's LLC that each own 50% already exist
In our case (Canadians), any income will come through the existing LLP to avoid double taxation (see previous post about LLCs)
If our partner was not a resident of the US, we may have avoided involvement of a US entity at all in the ownership to contain the relationship to Mexico and Canada.
If we did not already have a US LLP in place, we may have used a net new LLP instead of a net new LLC to manage he property. I just would have had to convince my US friend that an LLP is pretty much the same as an LLC from his perspective. Hey, they use the same 1065 tax form!
I will start prefacing post titles with "Mexico" for posts that are specifically about owning/managing a property in Mexico.
Tuesday, December 30, 2014
Penasco started as a tiny fishing village, and has grown dramatically in large part due to its proximity to the US (1 hour drive) and in particular to Phoenix (3.5 hour drive). Penasco now has a population of about 50,000 depending on time of year and how many of the Canadians and Americans that own property there are present.
My friend knew I was planning to be in Phoenix without much of a plan for a week in February so he offered the use of his condo in Penasco. "Really? I am going to ride my motocycle into Mexico? I don't think so!" After questioning my manhood, he offered to drive down for a couple of days with me as he needed a break too. "OK, I'm in!".
What a great place! It is literally on the ocean (Sea of Cortez). Fishing boats operate from there. I guess that figures...it is a fishing town. You can go to the Malecon Fish Market near the docks, have a few pops at a number of great little restaurants / pubs, pick up some fresh fish or shrimp, head back to the condo and fire up the BBQ. Nice!
There are some amenities there, including a Sams Club and a Burger King...but not enough to ruin the character. There are long stretches of beach on both sides of Penasco. The stretch to the northwest is called Sandy Beach, and it is home to about 8 large resorts full of condos. There are a few more resorts to the south. An international-class airport was built a few years ago and so far it is underutilized, but clearly it was sized for growth. And, get this...a cruise ship port is being constructed to the west of Sandy Beach!
The ocean is relatively warm, and very clean. Check it out on Wikipedia: Puerto Penasco or Rocky Point.
What about the drive down? A non-issue. Penasco is in the "Free Zone" or "Hassle Free Zone". Americans and Canadians (maybe others) do not need a visa or a "Temporary Vehicle Import Permit". The only additional purchase is Mexican Insurance for the vehicle, which is available online or at many locations in Phoenix or on the way down. The purchase is similar to Canadians buying temporary health insurance for traveling to the US. You can buy it for a few days or a week, or annually if you go there often.
Anyway, long story short, the friend found a good deal on a nice condo. We just closed on it. So now I will be figuring out how to administer and handle taxes across three jurisdictions. Yikes!
Friday, January 3, 2014
One year I did not have any US stamps for the "self addressed stamped envelope" so I just wrote the cheque for $5 and added a short note apologizing for not having the US stamp. They graciously stamped the envelope for me.
Sunday, December 29, 2013
The first discoveries were that TurboTax Business is much more expensive and also requires a separate purchase of TurboTax Business State to handle the Arizona Submission. Grrr. Well, Amazon had it on sale for $119 instead of $149...plus $50 for the State package. OK, it's cold outside so let's try it. Oh wait, software downloads aren't allowed outside the US. Double Grrr. After tricking it with a US credit card and address I finally got TurboTax Business downloaded and installed.
While I haven't got the final monthly statement from NRP (management company) yet I have a pretty good idea of revenue and expenses so I tried a pro forma return for one of the LLPs. Here are my first impressions.
1) The user interface is far better. More like I would expect given experience with Canadian personal tax software.
2) TurboTax Business is also more "system friendly". The H&R Block program needs to run as Admin, and I could never figure out how to direct where the data files are stored so they couldn't be treated as data to be backed up from a data directory. TurboTax Business runs without requiring Admin authority and you can easily direct where the data files are stored.
3) Handling of the property asset is more sensible. You enter the property value and then indicate how much of that is the value of the land, rather than entering two different assets. Side note...this is required because land is not depreciated.
4) Even though I was starting from scratch with no information being carried over from last year, the return was done in about 30 minutes! I had my return from last year handy and accounting records were up to date so there was no think/research time needed, but still the short elapsed time speaks well of the interface.
5) But wait...where are forms 8804 and 8805...the forms required to document with holdings for foreign partners? Not there! A call to Turbotax Support confirmed it...not included. Grrr again!
Ok decision time. $200 versus about $80. Plus it doesn't do the withholding part of the job, meaning downloading PDFs and filling those forms out separately. That is workable but I do like having all the data in one place, and having one consolidated output file containing all parts of the tax submissions for future reference.
Let's see if the software can be returned.
Has anybody discovered a better solution? It would be great to find a single package that supports the 1065 Partnership return, the withholding forms...and the personal 1040NRs. Good luck!
Yeah, yeah...I know...get an accountant. I don't think so!
Monday, April 8, 2013
In previous years I had entered the income on T776 forms...one for each property. This has worked well to date with the two minor irritations: 1) TurboTax didn't like US postal codes so that had to be fudged; and 2) the Canadian depreciation formula is a bit different from the US formula requiring separate tracking.
Well, now I can add another more serious concern. This is the first year we had to pay US tax. We have always had to file US returns but this year there was enough income that a bit of tax was due. So, naturally, we would want to claim a Foreign Tax Credit to recover that tax paid on the Canadian return to avoid double taxation. No go. The T776 is not implemented by TurboTax to support foreign properties so it doesn't accept an input for foreign tax paid. No problem, right? Just enter it on a FTC worksheet? Nope. Turbotax is too helpful. You can't enter the foreign tax paid directly on the FTC worksheet...you drill down until you get to...wait for it...yep, the Foreign Slips input sheet. That's the same input sheet used in the other method of entry where the amounts roll up to "Other Income". And for the FTC be accepted, the accompanying foreign income must be reported there as well. That makes entering it on the T776 a duplication.
I called the Tax Expert service provided by Intuit. They were very helpful and understood the question, but could not find a good workaround for entering the foreign tax paid while using the T776 either. Potentially using a T5013, but that may have other implications, and I did not try that.
So, for our case, I have switched to recording the US Rental income as Other Income / Income from Foreign Slips. It is very simple, keeps the details of accounting on the US side of the border, and allows the entry of foreign tax paid in support of the FTC. The "foreign slip" is the K1 slip(s) generated by the LLP(s) in the US if the properties are held in LLPs. The foreign tax paid comes from the individual's 1040NR (US Federal) and 140NR (State) returns.
Having said that, B (the blog reader who has been helping test this) has also tested UFile (competitor to TurboTax) and found that FTCs can be manually entered on a T2209. So if using UFile, T776s can be used to record the income and expenses, and T2209s to record the FTCs. This may be a good option if you want to take advantage of differences in how depreciation is handled in Canada versus the US. For example I believe Canada provides the option to not depreciate a property (and therefore not be reducing the cost basis of the property for a future capital gain calculation).
Friday, March 15, 2013
After some searching, I found this document that seems to be the IRS position on the ins and outs of interest: http://www.irs.gov/pub/irs-pdf/p535.pdf
The way I read it, interest is deductible if it is clearly in support of the business, and there is a description of rules around that determination. It does say that mortgage interest is generally deductible, but I did not interpret it to say that was the only interest that was.
You can reach your own conclusions. My interptation is that if it is not a mortgage or other loan secured by the property, then care would be required to ensure there is no doubt that the loan was clearly for the business...but you may have some latitude.
Thanks to the sharp-eyed reader!
Wednesday, March 13, 2013
First, premises to keep in mind (see previous posts): we hold the properties in US LLPs (one property to an LLP); in the US LLPs file a 1065 return (with attachments) and generate a K1 form showing allocation of profit to each partner, and each partner files a 1040NR reporting the allocated profit as income. While the LLPs introduce an administrative difference (to not using LLPs), the net effect is that rental income ends up being reported and tax paid on individuals' 1040NRs...so from a US taxation result perspective, rental income is personal income and the LLPs are "transparent". I am sure the details can be debated, but that's the net of it.
OK, so what about Canadian Taxes? Well, the general idea is that US personal income is reported to both the US and Canadian Governments independently, and tax paid independently. To avoid double taxation, there is a tax treaty between the two countries that allows tax paid to the foreign (US in this case) government to be recovered on the individual's home (Canada in this case) tax form. The mechanism is a "Foreign Tax Credit". Of course, the "general idea" doesn't always work perfectly, and there are cases where you don't actually get the money back through the FTC. But let's assume the general case when the FTC works.
The rental income must be reported on the individual's Canadian personal tax form, and there seems to be a few ways that it can be done. I haven't been able to get anyone to say "This is the correct way to report it...". I have heard "Yes, none of the ways you suggest would be INcorrect." Great.
For the first few years, what we did was report the income from the 3 properties exactly if they were 3 Canadian properties. So, we converted the income and expenses to Canadian dollars, and reported them on T776 forms...Statement of Real Estate Rentals. There were a couple of challenges with this: 1) There is a minor difference between the expense categories recognized by the IRS (US) and the CRA (Canada), so we had to make sure our accounting spreadsheet accommodated both. If I recall correctly the difference was in the breakdown of Maintenance and Repairs: separate on one and combined on the other. 2) There is a different calculation for depreciation. And 3) the Canadian tax software didn't like a US address...so we had to fudge that.
I have been conversing with a few readers who also have looked into this, and a couple of other alternatives came up. (A) Report the income as "Income from a Foreign Partnership"; or (B) just report the income as foreign income.
(A) Reporting the income as "Income from a Foreign Partnership seems to drive the need to issue a T5013 Foreign Partnership Information Return...which otherwise didn't seem be be required. Ugh.
On the other hand, (B) reporting the income simply as foreign income seems quite straight forward. For the latter, it appears we can simply record the income and foreign tax paid on a "Foreign Slip" in TurboTax. TurboTax would then transfer those totals to the line titled "Other income from foreign slips" on the "Other Income, Deductions and Credits" schedule, and then cascade it to Line 130 "Other Income Specify (See attached schedule)" on the T1 General. Very simple, and provides the input to the Foreign Tax Credit at the same time. I like it.
We haven't yet filed our Canadian Taxes this year, but I will try the "foreign income" route to see how it works in practice. This will imply that we are not doing a separate depreciation calculation in Canada because we are just reporting the net income as calculated by the LLPs, but the difference is minor and I believe the Canadian calculation is a bit more aggressive, so I don't expect anyone to be concerned.
A tax professional that I talked to opined that "none of the above is incorrect", but he did caution that changing methods like I am contemplating may throw up a red flag and may cause questions or even an audit. That is certainly possible, but I think we have been as diligent, conservative, and above board as possible so that does not cause me concern.
Again, we are not tax professionals. Just sharing opinions. Your mileage may vary.
Oh yes...I mentioned above that the FTC doesn't always work. In past posts I have hypothesized that one such case is if you hold the LLPs in a Canadian Corporation...so you are paying personal tax in the US and Corporate tax in Canada. As far as I know personal US tax can't be recovered through a FTC against Corporate Canadian Tax. But another "gotcha" that I have heard is that if one of the partners in Canada doesn't have enough income to require tax to be paid, then the FTC doesn't return tax paid in the US...because the FTC is a credit against tax "to be paid" in Canada, and applying the FTC cannot generate a refund. Grrr.
Monday, February 18, 2013
Azizona has a "Transaction Privilege Tax", sometimes called a "sales tax". But the implementation varies depending on where you are in Arizona. For some parts of Arizona, it is set and collected by the state, and in others it is set and collected by the city you are in. Cities that implement the tax on their own are called "Non-Program Cities". It happens that most of the cities (maybe all) in the Greater Pheonix Area are Non-Program Cities: Phoenix, Avondale, Glendale, Chandler, Mesa, Scottsdale, etc.
Typically they each have a sales tax that applies to rental properties, and the property manager or landlord must collect and submit the tax to the appropriate tax authority. For example, our properties are in Avondale (2.5%) and Phoenix (2%).
It is highly recommended that rental property owners notify the Maricopa County Assessor that the property is being rented, and submit the appropriate taxes. Penalties for not doing so can add up quickly. The property will be flagged as a "class 4" on the Maricopa County Assessor site.
In our case, we are fortunate in that the property manager (National Rental Pros) collects and submits the tax on our behalf to Avondale and Phoenix. If not, we would have to do monthly submissions ourselves. A reader let me know that after doing monthly submissions for a year, you may apply to do annual submissions although that may depend on the particular city.
Links for more information. One is for Avondale (an example), but search on the equivalent for the city you are in.
Sunday, February 17, 2013
Well, the "fiscal cliff" came and went, and sure enough on January 3, 2013 the "American Tax Relief Act of 2012" was passed. It made permanent and indexed for inflation the previous exemption.
As usual there is a lot of detail and complexity in the tax provision, and you should consult with your own professional advisors. But I am not going to worry about it as it looks like for our situation it will dramatically reduce or eliminate US estate tax.
Saturday, February 16, 2013
- The LLP is supposed to withhold and submit a percentage of income on behalf of partners. For standard income it is 35%!
- So in the case of these small LLPs, this amounts to the LLP withholding and submitting to the IRS much more income than will ultimately be owed by Partners as calculated on their individual tax returns. Yet, if the LLP doesn't do the withholding, then a penalty may be assessed by the IRS.
- A side effect of this is that the LLP sends the IRS too much money, and then the partners claim back the escess, effectivly doing a distribution to the partners from the LLP.
- One thing that can be done to mitigate this is for the partners to complete 8804-C forms that indicate they will have an exemption to reduce tax owing. Those are given to the LLP, which then can reduce the withholding amount accordingly, and submit a smaller withholding to the IRS. It will still be too much, if as in our case, the partners have very little US income so the tax will be calculated at a low rate. But it helps.
For any IRS staff that might happen to read this, how about changing the wittholding rules so there is a clip level that excludes LLP's with small incomes, or allocations to partners of a few hundred bucks. There must be a cost of collecting all this paperwork and the withholdings, and then giving it back. Make it easy to invest in the US!
- Our properties were acquired in 2009, 2010, and 2011 respectively.
- All are rented through National Rental Pros, and they have done a very good job of keeping them occupied
- Of the 3 properties, we had one "accounts receivable" problem for 5 or 6 months, but it was a personal decision to work with the renter and not evict right away, so that impact could have been reduced to a month or two at most.
- Overall return on capital invested has averaged 5.7%, 7.6%, and 5.3%. That is average return for a 12 month period, not including the accounting impacts of depreciation. I.e. Those numbers are based on cash flow.
- No US or Arizona Income Tax was paid in 2009, 2010, or 2011, because the "profit" allocated to each partner was less than the allowed exemption. The exemption is $3800 federally, and $2100 at the state level per partner.
- In 2012 we paid about $400 total between federal and state tax on about $6400 income...for each partner. Of course this depends heavily on not having any other US income so the exemption has full effect. If the exemption was already used for other income, it would be different.
- That US tax should be recoverable as a "foreign tax credit" on our Canadian tax returns. We haven't done those yet, so time will tell.
This is a risk tolerance decision. The decision to hold property in some other way than in our own names is meant to recognize that this is a business, and the liability risk (e.g. from an accident involving a renter) should be contained to the business. So, the question is: will liability insurance be sufficient, or do we want the added protection of a limited liability construct? We chose to go with an ownership mechanism that would limit liability, but we made that decision when the most liability insurance that we could immediately find was $500K, which we felt was insufficient. Subsequently we moved our insurance to another company that provided $2M liability. If that had been in place initially, it would have been a more interesting decision. Not sure which way we would have gone, but that decision is behind us.
Given a choice to limit liability, the question is LLC, LLP, or something fancy such as a trust or corporation? LLC's are what most US residents use, but in my research it appears that for Canadians there is a possiblilty of double taxation. The tax treaty between the US and Canada provides for claiming back tax paid to the US government on Canadian tax forms (Foreign Tax Credit), but only if the income is of the same type. Canada doesn't seem to recognize the LLC construct which provides the limited liability characteristics of a corporation, but with the income being taxed as personal tax. If Canada thinks it is a Corporation, then it sees the tax paid in the US as corporate tax, and may not allow the Foreign Tax Credit to be applied against personal tax in Canada. But Canada does understand partnerships (which is what a limited liability partnership is), and the LLP has the same liaibility limitation characteristic...so we used LLPs. Of course an LLP is a partnership which requires more than one individual or entity, so if that is not your situation, then it may not apply.
A US Corporation would work, but reasearch at that time indicated that real estate rental income and capital gains from appreciation in real estate are taxed at higher levels with a corporation. Then, to avoid the same mismatch in income types as above, the US Corporation would need to be owned by a Canadian Corporation, with all the administration and cost that would bring with it.
Some advisors recommend a trust, or a "Cross Border Trust" (whatever that is). Sounded complicated and costly to maintain to me. A few that I know that went that way spend $1000 or more each year maintaining it. But I will admit to not fully investigating it.
So every year, I curse the LLP decision, but then after the taxes are done we are happy to have the extra layer of liability protection.
For what it is worth, the reader that recently asked me also asked his insurance agent, bank manager, and lawyer. "Ah, doen't worry about it...$2M insurance is good enough."; "LLP"; and "LLP" respectively. Please let me know what your advisors say!
US Federal (IRS):
- Each LLP requires a 1065 Return with attached schedules: 8825 Rental Income/Expense Schedule; a 4562 Depreciation Schedule; B-1 (Information about Foreign Owners) Schedule; and a K-1 Schedule for each partner. The 1065 is the overall tax form for the LLP describing revenue and expenses: one item of which is Rental income. The 8825 schedule and supporting 4562 provide the detail of the Rental Income and Expenses. After the resulting profit is calculated, it is allocated to the partners and the K-1s report on that allocation. A copy of the K-1 is provided to the partner as input to his/her individual tax return, similar to a T3 or T5 in Canada.
- Each LLP requires a form 8804 (1 for the LLP), with supporting 8805 forms for each partner. These are also sent to the IRS, and in fact to the same address as the 1065...but sent separate from the 1065. Since foreign partners cannot be trusted to pay their tax due, the LLP is required to withold tax and submit it to the IRS on behalf of the partners. Partners then provide the calculation on their individual tax forms, and claim back any difference from the IRS. Anyway, form 8804 calculates the overall wittholding that the LLP owes the IRS on behalf of the partners, and the 8805 forms (one for each partner) show how the withholding is allocated to each partner. Form 8813 is a remittance form that indicate how much is on the attached cheque (check) being sent to the IRS. The partnership is supposed to do quarterly remittances using form 8813; and then at tax time the 8804/8805s summarize.
- Each LLP doing business in Arizona requires form AZ165 (submitted with a copy of the federal return attached) to be submitted to the Arizona tax authority.
So, 3 sets of documentation; 3 LLPs...3x3=9 mailings. Nice.
Wait, we're not finished. Now the partners need to file individual returns.
- Each individual files a 1040NR to the IRS; with attached K-1 and 8805 forms from each LLP; and
- Each individual files an AZ 140NR to the Arizona tax authority for income related to business in Arizona.
Different addresses of course. Two mailings x two partners = 4 mailings.
13 mailings in all!
We used the H&R Block Business software to create the LLP returns/schedules; and then just downloaded fillable PDFs for the individual 1040NR/140NR returns. The latter are pretty simple to fill out.
One material point: The LLPs can declare whether their real estate income will be treated as "passive" or "effectively connected" income. We declared ours to be Effectively Connected so that tax is on profit (revenue-costs); and also there is a $3800 Exemption on the partners' 1040NR returns which only applies to Effectively Connected income. As always, see your own tax professional for advice.
Monday, December 31, 2012
"FREE Canadian seminar at the Blackfoot inn
Hosted By: Dave Dziedzic & Jeff Dicks
Date & Time: 1/14/2013 7:00:00 PM
* State of Arizona Market
* Buying Process
* Tax Advice
* Property Management
* Great Tips
Be sure to sign up and secure your spot. "
This is right after the HomeExpo (Jan 11-13) so there may be other real estate professionals also up for the show and offering seminars. I point out this one because it is the seminar that answered a lot of our initial questions and started us down the path of investing in Phoenix properties.
Note: The web site initially incorrectly listed the date as the 15th, and that error was propagated here. The correct date is the 14th.