Taxation for Real Estate Investors Course Speaker Allan Madan, CA Tel: 905-268-0150 E-mail:...
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Transcript of Taxation for Real Estate Investors Course Speaker Allan Madan, CA Tel: 905-268-0150 E-mail:...
Taxation for Real Estate Investors
Course Speaker
Allan Madan, CATel: 905-268-0150
E-mail: [email protected]
1
Ownership StructuresIndividualCorporatePartnershipCo-ownershipTrust
Allan Madan, CA - 905-268-0150 - www.madanca.com 2
Ownership - IndividualAdvantages
Simple (T1 return)Can use losses against other sources of income
DisadvantagesUnlimited liabilityDifficulty in obtaining financing
Allan Madan, CA - 905-268-0150 - www.madanca.com 3
CorporationAdvantages
Simple for multiple ownersFlexibility in transferring ownership interestsLimited liability protection
DisadvantagesSlightly extra tax in Ontario, compared to
individualLoss trapped inside corporationBonus restrictions per CRA (Specified
Investment Business)
Allan Madan, CA - 905-268-0150 - www.madanca.com 4
5
Corporation - ContinuedTo discourage individuals from deferring tax
by placing their investments in private holding companies – high tax @ corporate level
Individual pays same amount of tax on investment income, whether individual earns income personally or through a corporation
Allan Madan, CA - 905-268-0150 - www.madanca.com 6
Corporation - ContinuedFour Step Approach to taxation of investment
income earned by a Corporation:1. Corporation is taxed on its investment income
at the full federal corporate tax rate 2. When the corporation pays a dividend, it
receives a partial refund for taxes it previously paid on that income
3. When the dividend is paid to an individual, the dividend is included in the individual's income
4. The individual claims a dividend tax creditAllan Madan, CA - 905-268-0150 - www.madanca.com 7
PartnershipAdvantages
Losses and profits flow through to partners (T5013’s)
Can select year end and defer tax – e.g. Jan 31 year end
Flexibility in adding and removing partnersLLP’s
DisadvantagesJoint liability in general partnershipsAt risk rules limit write-offs to initial investment
(llp)Allan Madan, CA - 905-268-0150 - www.madanca.com 8
Tax DepreciationOctober 2007 Budget – Tax Depreciation
Buildings (commercial) – 6 %Buildings (residential) – 4%Buildings used in manufacturing – 10%
Allan Madan, CA - 905-268-0150 - www.madanca.com 9
Other Tax DeductionsGeneral Test – “Incurred for the purpose of
earning income from property”ReasonableTypical expenditures include:
Maintenance and repairsInsuranceUtilitiesAccounting and legalCondo fees
Capital expenditures – tax depreciation
Allan Madan, CA - 905-268-0150 - www.madanca.com 10
Sale of Property – Income vs. CapitalCapital Gain – 50% TaxableIncome – 100% Taxable
Example:Sale Price of $500,000Cost of $100,000Tax Rate is 40%Capital Gain - $80,000 in taxIncome - $160,000 in tax
Allan Madan, CA - 905-268-0150 - www.madanca.com 11
Sale or Property – Income versus CapitalFactors affecting determination:
Relation to your business E.g. developers
Number and frequency of transactions undertaken E.g. history / pattern of flipping properties
Time Period Held E.g. Short versus long-term investor
Factor motivating sale E.g. Unsolicited third party offer
Intention E.g. vacant land, then immediately rezone
Allan Madan, CA - 905-268-0150 - www.madanca.com 12
Specified Investment BusinessSpecified Investment Business
Primary purpose is to earn investment income (e.g. rents)
Fewer than 6 full time employeesDisadvantages
No small business deduction – high rate of taxBonus to owner must be reasonable
Allan Madan, CA - 905-268-0150 - www.madanca.com 13
FinancingInterest Deductibility
There must be a legal obligation to pay interestBorrowed funds must be used for purpose of
earning incomeWhat do the banks want?
Historical financial statements – CA Cash-flow forecastStatement of Net WorthAppraisal
Debt should be inside corporation
Allan Madan, CA - 905-268-0150 - www.madanca.com 14
Financial Reporting & Tax ComplianceAccurate financial reporting is key!
Say no! to spreadsheets; QuickBooksMaintain separate bank account and credit
cardBookkeeperNotice to Reader Financial StatementsProposed Adjusting Journal EntriesCorporate Tax Return (T2)Personal Tax Return (T1)
Allan Madan, CA - 905-268-0150 - www.madanca.com 15
US TaxBuy real estate personally then file 1040NR
@ Federal levelIf the real estate is purchased in a state
where there is individual tax levied, then you will also need to file a non-resident State Tax Return
Possible to buy real-estate in the US through a US corporation
Allan Madan, CA - 905-268-0150 - www.madanca.com 16
Tax Planning TipsFamily Trust
Split income among family membersFuture growth in property accrues to children /
spouseHome Loan
Use corporation’s funds to purchase home, through loan – prescribed interest rates, repaid
Principle Residence ExemptionMore than one residence (e.g. cottage and home)
Inter-corporate loans – real estate purchase
Allan Madan, CA - 905-268-0150 - www.madanca.com 17