Real estate investment in US and depreciation consequences

[czemel]

Hi,


I'm a Canadian who owns real estate investment property in the US through a Nevada based LLP. My question is in regards to the long term impact of different depreciation schedules and the tax implication of it. Specifically, when I sell of the properties (assuming all will be sold in the same year) will I end up with a higher tax burden in the US and end up with a foreign tax credit I can't even use. I'm assuming this is something that is being faced or will be faced by any Canadian who own investment real estate (ie rental properties) in the US

Since the rules of depreciation are different we are required to back out the US depreciation from the K1 and recalculate for the T1 when reporting the rental income on the foreign slip.
The tax implication is that on my US tax return there won't be any taxes to be paid since the depreciation effectively creates a small loss. On my Canadian tax return I need to pay taxes since I have some real estate income profit.
SO effectively whats happening is my recapture rate will ultimately be much higher in the US than Canada since in Canada I am paying taxes now on the rental profit whereas in the US there is no tax obligation on the rental income, but will have to deal with a large recapture once I sell the properties.

So what I am predicting is that when I sell the properties I will have a Larger capital gain in the US and a larger $ amount subject to recapture taxes. In Canada I will have a smaller $ recapture amount and a smaller capital gain. Assuming in both countries I would get taxed at the highest rates am I correct to assume that I'll end up having a higher tax burden in the US and thus won't be able to us all the US Foreign tax credits since it will surpass the Canadian taxes owed.
If that is the case, is there any remedy for it? My goal would be to have a higher overall tax burden in Canada and not have credits that would go to waste.

[nelsona]

Such is life.

The best you can hope for is a currency change that would make your Cdn tax higher. In fact, if you bought when the C$ was at par and sell anytime later (since the C$ will never be at par again this side of the 2030's), there is your increased Cdn tax burden. Yippee.

But, correct me if I'm wrong, isn't the IRS depreciation rate on buildings 3.63% (27.5 years), while CCA in Canada is max 4%? Wouldn't that make the net about the same (or at least on the same side of the profit/loss equation? Am I missing something?

[czemel]

[quote="nelsona"]Such is life.

The best you can hope for is a currency change that would make your Cdn tax higher. In fact, if you bought when the C$ was at par and sell anytime later (since the C$ will never be at par again this side of the 2030's), there is your increased Cdn tax burden. Yippee.

But, correct me if I'm wrong, isn't the IRS depreciation rate on buildings 3.63% (27.5 years), while CCA in Canada is max 4%? Wouldn't that make the net about the same (or at least on the same side of the profit/loss equation? Am I missing something?[/quote]

You bring up an excellent point. The properties for the most part were purchased when the CAD dollar was stronger. Not all at par. And a couple as high as 1.18 (1USD = 1.18 CAD). SO that will hopefully make up for the different depreciation schedules.

I believe you are correct about the depreciation. For my case, what happened is the first few years had very high expenses (special management fees) in the US so I had some major loses. And in the US you are allowed to depreciate regardless if it creates a greater loss. Whereas in Canada you are not allowed to. So I have a greater loss in the US that has been carried forward and offset against US real estate income. However, in Canada the loss is smaller so less offsetting due to less depreciation taken in the first few years.

[nelsona]

The reasons in your case are usual, but the result of having mismatched tax credits is not. one of the costs of a cross-border real estate venture.

Just so you know, you MUST depreciate in US, regardless of loss. even if for some reason you chose not to depreciate, IRS would still reuire you to recapture the depreciation as if you took it.

[czemel]

Yes, I am aware of the mandatory depreciation requirement in the US. Thanks for pointing out the exchange rate part. That could be the saving grace. Its almost like I want to pay more taxes in Canada, LOL

[nelsona]

.. don't use the quote feature in future, as you see it doesn't really work. And I know what I already wrote

[czemel]

No problem. I used it initially because I wasn't sure if other people would chime into the discussion. Thanks for your input.

[Carasad]

I am not a professional in the law area, but you might need a good financial adviser for that. When I was going to move from London to Cardiff, I went to the Mortgage Broker Cardiff (https://Cardiffmoneyman.com). They helped me to choose the right house and the best mortgage rates. I bet I would not be able to get this offer without their help and advice. That’s why I recommend you to look for a good company to help you with it. It is always better to have someone who knows what they are doing and someone you can rely on. This is especially important in the domain of money and business.

[Feduk]

Thanks for the information.

[LucilleLoveland]

It's sad, of course, but there's nothing you can do about it.

[LucilleLoveland]

It's sad, of course, but there's nothing you can do about it. The most logical thing is to increase the Cdn tax due to currency changes. In general, here you need to read about it on the Internet or even consult with a specialist. I have been investing in real estate for a long time, and recently my profit has decreased several times. I decided to consult with a specialist, and he advised me one method brrrr strategy. I still yelled, and I managed to get my previous income back. So I recommend that you also try something new.

[LucilleLoveland]

It's sad, of course, but there's nothing you can do about it. The most logical thing is to increase the Cdn tax due to currency changes. In general, here you need to read about it on the Internet or even consult with a specialist. I have been investing in real estate for a long time, and recently my profit has decreased several times. I decided to consult with a specialist, and he advised me one method brrrr strategy. I still yelled, and I managed to get my previous income back. So I recommend that you also try something new. For more information visit https://parentportfolio.com/brrrr-method.

[NaletDaskon]

My friend works at renting a house on vacation, and she owns one beach house as well. She says that the tax is rising yearly, and she may have a lesser profit because she can't change the price that much. That's why buying real estate now is not as profitable as it used to be many years ago

[NaletDaskon]

NaletDaskon wrote:
My friend works at renting a house near the beach. She says that the tax is rising yearly, and she may have a lesser profit because she can't change the price that much. That's why buying real estate now is not as profitable as it used to be many years ago.
P.S:
Modern tendencies show that it gets harder to own a business and property in the USA because the taxes are sky high. However, it also depends on the state. My sister and her husband hold a business in another state, and their profit is higher

[LucilleLoveland]

NaletDaskon wrote:
> NaletDaskon wrote:
> My friend works at renting a house near the beach. She says that the tax is
> rising yearly, and she may have a lesser profit because she can't change
> the price that much. That's why buying real estate now is not as profitable
> as it used to be many years ago.
> P.S:
> Modern tendencies show that it gets harder to own a business and property
> in the USA because the taxes are sky high. However, it also depends on the
> state. My sister and her husband hold a business in another state, and
> their profit is higher
Thank you for this post, maybe it looks like this https://frequentislander.com/the-4-best ... e-rentals/? I really need to know, thank you!