Tax problems with real estate flips in - 1031exchanges INSTALLMENT PAYMENTS 6252 - Garth TURNER and the GREATER FOOL -
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.
HOWEVER,
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 www.garygauvin.com 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 http://www.dondnelson.com is making a good effort and in Reno, Jessi Pearce CPA at www.corycpa.com 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 www.greaterfool.ca. 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 www.howestreet.com 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 www.600am.com. 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 www.cknw.com - 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. ---------------------------
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].
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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:
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.
$1,700 would be for two people with income from two countries
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.
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