Taxation for Real Estate Investors

Course Speaker

Allan Madan, CATel: 905-268-0150

E-mail: amadan@madanca.comwww.madanca.com

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Ownership StructuresIndividualCorporatePartnershipCo-ownershipTrust

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Ownership - IndividualAdvantages

Simple (T1 return)Can use losses against other sources of income

DisadvantagesUnlimited liabilityDifficulty in obtaining financing

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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)

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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

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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%

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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

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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

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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

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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

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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

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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)

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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

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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

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