From Our Partner: LegalShelf Company

Q. Should I hold US property in my own name?

A. You can, but it’s not ideal, at least from an asset protection point of view.

Q. What is the best entity choice for a Canadian who wants to hold US property?

A. That’s a really complex question. The answer will depend on what you want to do, who you’re doing it with, how much you want to spend, your long-term goals, and more. One solution would be a US Limited Partnership, with another company, either a Canadian corporation or a US corporation, acting as the General Partner, and you being the owner, or Limited Partner. You could also consider using a Canadian partnership that registers into the US.

Q. I have heard that most people buy real estate in an LLC – is that something I should do?

A. That depends. If you are buying real estate with the intent of holding it for a long time, and you want to immediately access the rental income and get the best capital gain rate on a future sale, absolutely not. The LLC will cost you money in that situation. But if you are buying properties with the idea of turning them over quickly, then an LLC can be an excellent vehicle, if used properly.

Q. What’s the difference from a tax perspective between holding property for rental income and buying properties to turn over quickly?

A. On the US side, rental income activity is considered to be a passive, investment activity. You have a lot of deductions to take against that income, which can often significantly reduce your tax rate. The income you generate through quickly buying and selling homes is taxed like a business. Again you have a lot of deductions you can take. But the real difference comes in a future sale. Long-term rental properties that are sold recognize their gain as a capital gain, which right now can be taxed at 20% in the US. But short-term properties that are bought and sold quickly don’t receive capital gains rates. Those will be taxed at regular corporate income tax rates, which can be anywhere from 25 to 35% or more.

Q. How do taxes impact me as a Canadian investing in the United States?

A. Taxes will impact you 3 main ways: income tax on money you earn, gains tax on the profit you make from a sale, and estate tax on the value of your US assets when you die. Each one has different rules and plans. It’s really hard to find a single solution that gives you the best of all worlds. If you plan only around estate taxes, you can pay more in income tax and capital gains tax. If you plan around income/gains tax, you can wind up with estate tax issues you weren’t expecting.

Q. How much will I pay in Taxes in the US?

A. That depends. You can pay as much as 30%, or considerably less – maybe even less than 10%. How much you pay depends on how you come into the US tax system, the entity type you use, and other factors.

Q. What is flow-through taxation? I hear that referred to a lot in US taxes.

A. Flow through taxation is an alternative tax mechanism used in the US. With regular corporate taxation, the corporation has its own tax rate. Income generated in the corporation is kept there. On its tax return, the corporation prepares its own tax return. It reports its income, deducts all available expenses, and winds up with its taxable income figure. Then taxes are paid on that figure, calculated on the corporation tax scale. With flow-through taxation once the entity has calculated its taxable income, the income is transferred to the owners. Each owner shows their share of the income on their individual tax return, and pays income tax at whatever their personal rate is. The entity still files a tax return, but it’s informational.

Q. Why do people say flow-through taxation is better?

A. It depends on the circumstances, but often flow-through taxation results in a lower overall tax bill. That’s because of something called double-taxation. Your corporation must pay tax on its income, and then if you take out the profit as a dividend, you have to pay tax again, this time on your personal return. When you add those two taxes together, they can often be higher than if you had dealt with the same amount of income in a flow-through company.

Q. Can you give a specific example of the tax calculation between a corporation and flow-through?

A. Sure. The answer is more complex usually, but this is a simple example. Let’s say your US corporation has $50,000 in taxable income. The tax on that is 15%, or $7,500. That leaves $42,500 in after-tax profit. You want to take out a dividend of $30,000. You have to declare that income on your personal return now, and pay dividend tax, which is 20%. So you pay another $6,000. You’ve paid a total of $13,500 in taxes. In the flow-through example, you would show $50,000 on your personal return, where it was taxed at your personal rate, which was about 25%. The tax bill in that case would have only been $12,500.

Q. How is that money taxed in Canada? Do I have to pay taxes twice?

A. Not in most cases. The US-Canada tax treaty allows you to offset what you pay in the United States against your Canadian tax bill, so you don’t wind up paying two times on the same dollar.

Q. I was told that investing with a corporation was best because I wouldn’t file personal income tax or have to pay US estate tax. Is that true?

A. Yes and no. If you set up a US corporation to hold your US real estate you won’t have to file a personal tax return – at least until you want to pull money out through a dividend. But when you pay that dividend you will face the same choice: lose 30% in tax or file a personal tax return in the US to get some of that 30% back.

With estate tax, it also depends. If you own a US corporation, partnership or property directly, you will fall under US estate tax rules. If you use a Canadian company or an offshore company you may not. BUT the US-Canada tax treaty also gives Canadians a very generous exemption from paying US estate taxes. Unless your total estate is over USD $5m, you likely won’t have to pay any US estate taxes.

Q. How hard is it to pay taxes in the US?

A. It’s actually quite easy. You’ll need to first register with the US tax authorities, aka the Internal Revenue Service, or IRS, to get a personal tax identification number. That will be the number you use on your personal tax return.

Q. When are taxes due in the US?

A. The due dates will differ, depending on your circumstances. A Corporation may have to pay estimated taxes quarterly. As an individual, you will likely need to pay personal income taxes by June 15th each year.

Q. When are tax returns due in the US?

A. Those dates will differ, depending on your circumstances. Partnerships file on or before April 15th each year. However, they can file an extension of time to file  return that moves it out to September 15th, each year. Non-resident taxpayers file on or before June 15th each year, but again, you can extend that date out by 6  months, to December 15th. Corporations file 2.5 months after their fiscal year-end date. So if your corporation ends its year on December 31st, it would file on March 15th, unless it files for a 6-month extension of time. If its tax year ended on March 31st, the return would be due June 15th, and so on. If you have to also file a state tax return, that will follow the federal rules.

Q. What is an ITIN?

A. An ITIN is short for Individual Taxpayer Identification Number. It is an alternative to an American Social Security Number, or a Canadian Social Insurance Number. It is the number you get to identify you to the US tax system. You will need it to file a tax return in the US.

Q. How do I get an ITIN if I hold property personally?

A. There are a couple of ways to get one. If you hold property in your name, you can apply for an ITIN at the time you file your first tax return. The IRS will first process your ITIN application, and then, once you have an ITIN, they will process your tax return. But that means you have to wait until you file your first tax return. During the time that you are waiting, you can’t avoid the 30% withholding.

Q. How do I get an ITIN if I set up a US business structure?

A. If you set up a US business structure you are eligible to immediately apply for an ITIN. That’s one of the benefits to using a structure.

Q. How long does it take to get an ITIN?

A. The IRS has just changed their whole process and what used to take 3-4 months is now taking 2-4 weeks, from the time you submit your application.

Q. Do I need a US Bank Account?

A. It’s a really good idea to have one. Property Managers in the US are not always willing to write checks or send money out of the country to foreign bank accounts. Prepaid VISA cards are an option but if the cards are lost in transit there can be an issue over payment.

Q. What is Effectively Connected Income?

A. Effectively Connected Income, or ECI, is an election you make on how you want the IRS to characterize your income. If done properly it can significantly lower the amount of tax you pay in the US.

Q. What is FIRPTA?

A.  FIRPTA is short for U.S. Foreign Investment in Real Estate Property Act (“FIRPTA”). Under FIRPTA, when someone buys your real estate property they are legally required to hold back 10% of the fair market value of that property to partially your gain tax on the sale. States may also have a form of FIRPTA that is on top of federal amounts. You may be able to offset the gain tax paid against the tax that will be payable in your home country. You may also be able to avoid FIRPTA by filing the correct documents with the IRS ahead of time – i.e. before you sell the property.

Austintown

Austintown is similar to Boardman, it is regarded as one of the most affluent areas in this region. The average price is higher than most of the surrounding areas, it is common to see homes above $100,000 in this neighborhood as it is a desirable place for families, and it is also located further west, which is closer to other areas such as Akron.

Most of homes here are newer homes built in the 1960s even 1970s, there are also new developments both residential and commercial developments.

The new racino development is expected to bring economic boost for the area especially for the retail and hospitality developments.

Investment Strategies

1) Single family homes – single family homes in Austintown are good demand, we see any home priced under $40,000 sold to investors very quickly even for homes that requires renovations. It is common to see renovated homes rent for above $700 per month, so the rental yield is pretty good.

2) Smaller homes – there are some smaller 2 BR homes in some parts of Austintown – the rent for 2 bedroom homes can be as high as $600 per month, this is also popular for investors to get started in Austintown.

3) Homes that can be converted or re-zoned – as commercial development activities are starting in Austintown, investors can also consider investing in selective residential properties and re-zone them into commercial use later on. Commercial properties can usually achieve higher rental income. In Austintown, there seems to be an increasing number of restaurants and professional services firms setting up here.

Struthers / Poland

The Struthers is a medium rated area in the greater region. It is located South to the Youngstown area. The schools here are generally good schools with some schools better rated than others.

The average income and real estate price is less than those in Boardman or Austintown, but higher than those in the Youngstown area.

The price range can vary from $15,000 to $100,000 homes. You can find older homes built in 1900s or 1910s for sale under $20,000 as opposed to homes built in 1950s and 1960s price above $65,000.  There is an interesting comparison that there tends to be more females than males in this area.

Investment Strategies

The investment strategies in investing homes here are:

1) Cheaper homes – some of the homes here are very well price, you can get a decent sized homes for around $30,000 or less, then you can renovate and rent them out. The average rent tends to be better in Struthers / Poland compared to Boardman.

2) Newer homes – there are fully renovated homes in the 1950s which are attractive to tenants due to schools and locations. Some of the newly arrived residents also prefer to live in these areas, most of newly arrived residents here would be renting as they are here for 3 to 5 year job assignments.

3) Duplexes – there are some duplexes available in this area, though not as many compared to Youngstown or Boardman as the population is smaller. Most of the duplexes are older duplexes and may require renovations.

Boardman

Boardman is an affluent area in this region, it has many nicely built homes typically built in 1940s and 1950s. Typical families are double income families, many are in managerial positions. There are also many upscale shopping plazas in Boardman.

The main attraction for Boardman is its school district, Boardman School District is rated amongst one of the top school districts in Ohio. If you look at the rating on the schools, most of its schools are exceptionally rated for its academic and performance. The combining factors have helped Boardman real estate market as one of the most stable markets.

Investment Strategies

The typical investment strategies to purchase real estate in Boardman are:

1. Look for opportunistic investments – there are occasional foreclosures or REO properties, investors do need to act fast as these properties tend to attract multiple offers. There are many local and interstate even international investors actively investing in Boardman at moment.

2. High yield properties – in Boardman, it is harder to find properties that can generate 20%+ net return because of the higher price. However, it is very common to find properties producing 14% to 16% net yield in this area. Typical 3 bedroom house can rent for $700 to $750 per month, on more up-scale markets, they can also rent out for $800 to $900 per month.

3. Buy and fix-up – there are opportunities in Boardman where you can buy into properties around low $30,000s that requires fix-up. This usually means change a roof, updating bathroom, updating furnace and maybe kitchen. The typical investment will be between $5000 to $10,000 to a home in Boardman area.

4. Duplexes or Quad-plexes – there are selective duplexes and quad-plexes built in the area, most of these were built in the 1950s and 1960s, the occupancy rate is typically very high for duplexes or quads in Boardman area, most of them are 100% occupied.

We are very experienced in investing in the Youngstown-Boardman-Austintown-Struthers areas, and we had invested in different types of properties in each city, here are our personal experience and knowledge:

Youngstown

Youngstown is an old city, it used to be one of the most prominent industrial cities in the areas, beautiful mansions can still be seen around Youngstown; many were built during 1930s and 1940s.

For Youngstown – we focus on 3 strategies:

1. For better neighborhoods and growth opportunities – we look for properties to the West and South of Youngstown where it joins either Boardman, Struthers or Austintown areas. These areas tend to appreciate due to better neighborhoods and better houses.

2. We are looking at selective Youngstown North and East areas, properties in these areas are really attractive, you could even purchase a real estate under $10,000 in some cases. For medium or lower income areas, our strategy is to find Section 8 tenants which provide consistent income, we prefer Section 8 tenants as the rent is always paid on-time and they will typically maintain the properties well as they do not want to lose their Section 8 status.

3. The 3rd strategy is looking for duplexes and quad-plexes in the area. Duplexes can also produce attractive yields, we had invested in duplexes that produce as high as 47% return, the typical range is around 25% to 30% return, which nets around 20% after expenses. Many duplexes were built in the 1920s and 1930s and will require some updates, demand for duplexes is actually quite high in these area, particularly from single dwellers (many are over 60s whose family members have moved to other state) or students as Youngstown State University (YSU) is showing increase in enrolments.

For Youngstown – our strategy is focusing in opportunities with strong cash yield, most of our investments are tenanted real estate with immediate cash-flow.

This area is in the middle section between Cleveland and Pittsburgh and serves as a key logistical center between the 2 cities and the center of the growing important industry in this region.

Many still see Youngstown as a declining area, but smart investors have been arriving into this region – particularly from California, and also as far as Europe and Australia in snapping up properties while cheap and rent out with very attractive yield.

The whole combined area including all the surrounding cities will add to around 700,000 in total.

Like any area – we will look at the Growth Factors & Risks first.

Growth Factors

1. There had been very few constructions in this area since the 1980s which means the supply is steady with no new developments. Some of the older houses were redeveloped into newer homes.

2. The job market is improving from the shale gas industry which also includes drilling, engineering, and more importantly, resurgence in steel related industries such as piping industry which has been growing due to strong growth from nearby gas drilling activities.

3. Several very large refinaries and plants had been opened in nearby cities, and as Youngstown is the largest city in the nearby areas, we are starting to see steady increase of professional families moving into the Youngstown area.

4. This is where GM’s Chevy is produced, it has a massive production plant with 3 shifts and is a major employer of the area. Chevy’s success has seen increase in production from this plant and continue to add more jobs to the region.

5. The Government has implemented successful policies for many years, the cities now enjoy low crime rate and is attracting families moving to these areas.

6. Properties are very affordable in these areas, it is common to see nice properties listed for $35,000 to $60,000 range. Investors have been buying both tenanted properties and also cheap properties (under $20,000) and renovate and lease them out.

7. Austintown is benefiting from the new racetrack and gaming facility which is the first such facility in the region. This is expected to bring in tourists from nearby states, and it is also contributing to Austintown Government to modernize the infrastructure. The new facility has also created new opportunities including new hotel developments, new shopping malls and new franchises and restaurants to the area.

8. Youngstown is also becoming a hub for call center operators with significant increase of call center operators opening up new businesses here servicing customers in the midwest and southwest.

The principals of Harbourview Capital are very experienced investors in this region – we can provide with research and identify where the opportunities are as well arranging for inspections, renovations and find tenants for your properties.

Ohio is an attractive real estate market for many international and out-of-state real estate investors. Ohio’s real estate is one of the most attractive markets in the United States and it is very common for investors to achieve rental yield above 15%, sometimes more than 20% as well.

Ohio’s economy is actually changing rapidly and it is transforming from its old days as the industrial area into medical, healthcare, education and IT industries.

The main real estate markets in Ohio are:

Cleveland – Cleveland real estate markets has many attractive properties with rental yield above 15% net, these are typically 3 bedroom houses built in the 1950s. Cleveland is also emerging as a major medical city in the United States, Cleveland Clinic is one of the most reputable institutions in the world, and Case Western University is also a highly ranked university in the world.

You can find attractive rental properties in Cleveland, you can also find luxury properties at reasonable price in Cleveland; there are also opportunistic multi-family apartments available for investment in Cleveland.

We do have a highly experienced Cleveland partner who has invested in hundreds of properties already that can assist in you with your investment.

Columbus – The capital city of Ohio and also now the largest city in Ohio. Columbus is showing consistent growth and it is the home of Ohio State University (OSU). OSU is one of the largest universities in the world both in terms of the campus size and enrolments.

Columbus is an interesting investment market – you can find upscale properties in areas like Worthington or Dublin. At the same time, Columbus has many high yield properties available for investors to choose from, some of them can start at around $30,000 for single family homes.

Duplexes and quad-plexes are also common in Columbus due to large number of students and single dwellers who are looking for 1 bedroom or 2 bedroom apartments, these apartments can rent at between $400 to $500 a month, which is attractive for investors.

We had been researching opportunities in Columbus for a long time and we have identified many interesting areas, we also have field partners in Columbus who can assist with your investment.