Tax problems with real estate flips in USA - 1031exchanges INSTALLMENT PAYMENTS 6252 - Garth TURNER and the GREATER FOOL -

Blank This is being sent as a warning to Canadians who are heading south to buy US Foreclosures and sell them on take backs or contracts or rent to own or just fix and flip.  It is also a warning to those US residents who are still looking at buying and selling real estate.  And please do not get me wrong.  I am not a buyer yet but will be soon when I figure it out.  With the help and leadership of Ted Bradshaw and Ross McDonald and Betty Scott and Robert Veillette and Gary Gauvin. Collectively, we did over 4,500 real estate deals before 1996 in BC, Alberta, Ontario, Arizona, Texas, Fiji and New Caledonia (off the coast of Australia).

I assure you I have had 100 calls, emails, faxes and phone calls in the last month from people who are on their way to Las Vegas, Phoenix, Dallas, San Diego and a dozen other US cities where the prices are hot and where US Realtors are discovering Canadians and putting packages together for them. In addition, I have had 1,000 people or more attend seminars i have spoken to on the subject since August 12, 2007.  There is a fantastic interest. 


Not one of the packages presented by US Realtors has been a good package for a Canadian in my opinion. With rare exceptions - Enrolled Agent, Gary Gauvin at being one - there are very few US based accountants who have a clue about how to deal with Canadians.  In Los Angeles, Don Nelson CPA and Lawyer at  is making a good effort and in Reno,  Jessi Pearce CPA at is moving into the US Canada Income Tax market and I heard from one on the East Coast lately but have misplaced his or her name.  But the fact is that after 45 years in this business I can count US based people on one hand. I am also happy to give out other people's names and contact info because we are just too busy ourselves most of the time.

Examples of questionable real estate deals.

One man for instance was going to buy in excess of 20 units from one US organizer.  The units would be sold immediately on 30 year contracts to renters, who, if they made their "payments" for 30 years would then own the property.  This person had already received an opinion from Revenue Canada that the payments he would be receiving were to be treated as interest.  In other words, the renters were buying for an increased price and had some sort of agreement (I have not seen one) that sounded like a cross between a conditional sales contract and an Agreement for sale.  He had missed the fact that i the payments are interest, the result is a sale and he owes tax now.

Now, in the US, the seller can treat it as an installment sale and defer the tax on the sale over a 30 year period by filing form 6252.  Canada also gives some credit for installment sales but 5 years is the maximum on From T2038.

As I saw it, he would be paying Canada more income tax in the first 5 years than he actually received in payments so he had better make sure he had other sources of income to pay the tax.  In addition, even though he was paying tax to the US, he would be totally out of sync in terms of foreign tax credits, an unworkable situation for a Canadian purchaser in my opinion even though it could make sense in the US.

Others were going to use 1031 exchanges as suggested by US Realtors and even a couple of US tax people.  1031 exchanges require you to avoid touching the money.  In addition, even if you do manage a good one from the US point of view, you still owe the tax to Canada 'NOW' and have wasted the 1031 management fee and again PUT YOUR FOREIGN TAX CREDITS IN JEOPARDY LEADING TO REAL DOUBLE TAXATION.

 I had this old article filed away and am taking the liberty of reproducing it here.  It was written in Sept 2009 when EVERYONE in NORTH AMERICA was on a real estate high.  As we know, there have been a few  hiccups  since then. 

Anyone reading this, should also be reading Garth Turner's book, the GREATER FOOL and paying attention to his website on real Estate values at  Garth and I will both be speaking on Sept 20 in Victoria at the Victoria Convention Centre and on Sept 21 2008 at the Nanaimo Convention Centre.  Go to and click on MONEY EXPO to preregister FREE OF CHARGE.

And Garth Turner will be a guest on the FRED SNYDER SHOW. - IT'S YOUR MONEY - Sunday July 13th at 9:00 AM Vancouver time at  And some good and Interesting News,.  On Saturday, July 12, 2008, Fred will be starting a new Show on CKNW at 6 PM.  I will be a guest and it should be interesting.  You can listen around the world at - click on the 'listen live' button  in the middle at the top.

Now that I have blatantly shilled for two radio programs I am guesting on and two seminars i am speaking at, please read the fallowing.  It is well written, ACCURATE AND VERY PRESCIENT in relation when Colleen DeBaise suggests that there was far more to worry about then the Bubble (which did happen a year later). Note that Florida was one of the worst and she mentions it and there was a picture of those fancy Florida Condos in the actual article.
>From here to where the Sept 19, 2005 date is printed are all Colleen DeBaise's and the Dow Jones Newswires' words. ---------------------------
Real-Estate Flip Deals
Have a Catch

By Colleen DeBaise
>From Dow Jones Newswires

Amateur "flippers" in the real-estate market have more to worry about than a bubble. Many of them could be facing an income-tax audit -- and higher tax bills than expected.

The popularity of so-called flip deals has made section 1031 of the Internal Revenue Code popular with real-estate speculators. In a 1031 exchange -- also known as a "like-kind" exchange -- a person who sells a business or investment property can defer capital-gains taxes by immediately rolling the gains into a similar piece of property.

The trouble, tax experts say, is that people don't understand the rules. Many trust the advice of real-estate brokers, who often aren't well versed in tax law. Some amateurs are buying and selling properties too quickly, running the risk that the Internal Revenue Service may deem the transactions a person's trade or business, with gains taxed as ordinary income and subject to self-employment taxes.

Flipping's attractions are undeniable: A study released this week by First American Real Estate Solutions, an Anaheim, Calif., data provider, found that the practice can reap big returns. The study looked at sales in three hot markets -- Las Vegas, Miami, and Orange County, Calif. -- between 1999 and June 2005 and found that the annualized rate of return for three-to-six-month flips was usually 20% to 40% or more above the market appreciation rate.

Condos under construction in Miami, an area where flipping is widely practiced.

While flip sales didn't dominate the market in any of the three counties First American studied, they did account for as much as half of all sales within particular ZIP codes. In the Las Vegas area, properties turned over within two years accounted for 52.3% of total sales in ZIP code 89119 and for 45.7% of total sales in ZIP code 89147 during the first half of this year. And in the Miami area's ZIP code 33150, flip sales accounted for 41.7% of total sales last year and 43.6% of total sales in the first half of this year.

Novice real-estate speculators who attempt to flip properties should make sure they understand the rules before they are ensnared in an audit, or forced to pay more than they bargained for come tax season. The best way to avoid a problem is to consult a CPA or tax attorney before beginning the real-estate transaction, as mistakes can be costly.

"The IRS hasn't looked at the like-kind exchange before," says Eric Kea, a tax partner in the real-estate practice at BDO Seidman in New York. "We're assuming they're going to, seeing what the market is."

An IRS spokesman wouldn't speculate on whether the IRS will investigate or conduct more audits of like-kind exchanges. In general, the agency dedicates more resources if there are concerns of non-compliance in a particular area, the spokesman said.

In a like-kind exchange, if you replace a property used for business or investment with a similar property, no gain or loss is recognized at that time. Most people do a "deferred" like-kind exchange, where a seller has 45 days to identify a replacement property and 180 days to close on the new asset.

The big mistake for novices, tax experts say, occurs when the seller takes possession of the cash proceeds of the sale. Under IRS rules, the money must be placed in escrow or held by a qualified intermediary (such as a trust company) until the replacement property is acquired. "If you take possession, you are essentially disallowed the use of 1031," says Lonnie Davis, a certified public accountant and director of CBIZ Accounting, Tax & Advisory Services in Plymouth Meeting, Pa.

To avoid taxes, you have to roll the proceeds into a similar property, which generally would be a business property or raw or developed land. You can't swap an investment property for a personal asset, such as a primary residence or a vacation home, Mr. Davis says.

In a like-kind transaction, real estate must be exchanged for real estate, a rule that sometimes trips up clients who have set up a single entity to hold property and shield them from liability. Often, experts recommend that clients liquidate the entity a day before the real-estate transaction so the swap qualifies for 1031 treatment.

Apart from problems with the like-kind exchanges, there are other common mistakes that amateur investors make. One is not holding the property long enough. You must keep the investment for at least a year before selling to qualify for the preferential 15% capital-gains tax rate. If you sell before a year, the gain is subject to the highest income-tax rate of 35%.

You can avoid the capital-gains tax altogether if you own and use the home as your primary residence for two years. Gains of as much as $250,000 for an individual and $500,000 for a married couple filing jointly are excluded. The two years doesn't necessarily have to be continuous, as long as you have used it as a primary residence for a total of two years within a five-year period, ending on the date you sell the property.

Email your comments to [email protected].

-- September 19, 2005  - end of the quoted article.


david ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
My Home office is at:
4466 Prospect Road
North Vancouver,  BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325

Calls welcomed from 10 AM to 9 PM 7 days a week  Vancouver (LA) time -  (please do not fax or phone outside of those hours as this is a home office) expert  US Canada Canadian American  Mexican Income Tax  service help.
pert  US Canada Canadian American  Mexican Income Tax  service and help.
David Ingram gives expert income tax service & immigration help to non-resident Americans & Canadians from New York to California to Mexico  family, estate, income trust trusts Cross border, dual citizen - out of country investments are all handled with competence & authority.
Phone consultations are $450 for 15 minutes to 50 minutes (professional hour). Please note that GST is added if product remains in Canada or is to be returned to Canada or a phone consultation is in Canada. ($472.50 with GST for in person or if you are on the telephone in Canada) expert  US Canada Canadian American  Mexican Income Tax  service and help.
This is not intended to be definitive but in general I am quoting $900 to $3,000 for a dual country tax return.

$900 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only (but were filing both countries) - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
$1,200 would be the same with one rental
$1,300 would be the same with one business no rental
$1,300 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.
$1,600 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits  no move in or out

$1,700 would be for two people with income from two countries

$3,000 would be all of the above and you moved in and out of the country.
This is just a guideline for US / Canadian returns
We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $200.00 up. However, if you have a stack of 1099, or T3 or T4A or T5 or K1 reporting forms, expect to pay an average of $10.00 each with up to $50.00 for a K1 or T5013 or T5008 or T101 --- Income trusts with amounts in box 42 are an even larger problem and will be more expensive. - i.e. 20 information slips will be at least $350.00
With a Rental for $400, two or three rentals for $550 to $700 (i.e. $150 per rental) First year Rental - plus $250.
A Business for $400 - Rental and business likely $550 to $700
And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.
Moving in or out of the country or part year earnings in the US will ALWAYS be $900 and up.
TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.
8891 forms are generally $50.00 to $100.00 each.
18 RRSPs would be $900.00 - (maybe amalgamate a couple)
Capital gains *sales)  are likely $50.00 for the first and $20.00 each after that.

Catch - up returns for the US where we use the Canadian return as a guide for seven years at a time will be from $150 to $600.00 per year depending upon numbers of bank accounts, RRSP's, existence of rental houses, self employment, etc. Note that these returns tend to be informational rather than taxable.  In fact, if there are children involved, we usually get refunds of $1,000 per child per year for 3 years.  We have done several catch-ups where the client has received as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund. 

Email and Faxed information is convenient for the sender but very time consuming and hard to keep track of when they come in multiple files.  As of May 1, 2008, we will charge or be charging a surcharge for information that comes in more than two files.  It can take us a valuable hour or more  to try and put together the file when someone sends 10 emails or 15 attachments, etc. We had one return with over 50 faxes and emails for instance. 

This is a guideline not etched in stone.  If you do your own TDF-90 forms, it is to your advantage. However, if we put them in the first year, the computer carries them forward beautifully.


Trackback URL for this entry:

No trackback comments for this entry.