Reasons NOT to invest in Real Estate

From a good friend, Dolf deRoos says,

"As the holiday season rounds the corner and you think about all the money you’ve spent on gifts this year, the last thing on your mind is spending even MORE money on an investment property. (If you did find one now, however, maybe next year for the holidays you could buy that sporty little BMW you had your eye on - as a gift for your significant other, of course!).
There are plenty of reasons not to invest, and we've heard them all, from "it’s the holidays" to "I’ll never find the great deals Dolf finds." But these are not valid reasons; they are just excuses. Dolf’s colleague, John Baen has provided us with some excuses why people do not invest. Here are the top five:

5. My Rich Aunt Gertrude is bound to leave me something in her will.

4. I can cash in those Coca-Cola collector’s bottles when it’s time to retire.

3. I am going to marry rich, so why make my own money?

2. I am bound to win the lottery someday, as I play every week!

We are not saying that these things won't happen, but your chances are only about .005%. If you think you are part of the .005%, stop reading this email and please buy US a lottery ticket.

And the number one reason not to invest in real estate is:

1. The interest rates are rising and the bubble is going to burst

Now, even though you’ve been hearing about the rising interest rates and the cooling market, this is actually beneficial in many ways to real estate investors, as explained in our recent report "How to Bubble Proof your RE Investments". Rising interest rates are useful to you as an investor because rising interest rates go hand-in-hand with inflation and appreciation. In other words, it helps to raise the value of a property. The amount you owe on the property will stay the same but the value of the property will have risen, resulting in an increase in equity.

That's all for tonight - gotta go check under the bushes for some presents.

Smokey

Fix and Flip

Well, here goes. As opposed to "buy and hold" rental properties, "fix and flips" need a different strategy.

Why? Rental generates passive income (no 15.3% self-employment taxes), while the short term capital gains that result from a flip can be termed earned or active income by the IRS. That adds the 15.3% employment taxes (ouch!) on top of the ordinary income taxes that you will pay.

Our alternative strategy focuses on reducing that 15.3% bite.

Definition:
1. A General Partner earns active income and holds all of the liability for a transaction.
2. A Limited Partner earns passive income and has no control or liability for a transaction (think shareholders)

Creative use of these facts provide the basis for a great strategy, and also let you selectively embrace the much maligned "Dealer Status".

Bye for now - more holiday shopping to do,

Smokey

What's a Professional?

Occasionally, the IRS uses phrases that have meanings that can be confused with popular usage. This is one of them.

A Real Estate Professional would be a Broker or a Realtor®, correct? Well, no.

It turns out that you don't need to be a Realtor® or anything like it. All you need to do is spend more time in real estate related activities than any other job, and at least 750 hours / year. So the real question is "What are real estate related activities?"

According to the IRS, a qualified real estate activity is any activity in which you “develop, redevelop, construct, reconstruct, acquire, convert, rent, operate, manage, lease or sell” real estate.

Details of these kinds of activities are illustrated in many places including Smokey's place.

This status has some incredible tax advantages, the most important of which is the ability to take unlimited paper losses on your real estate investments.

People who not meet the definition of a Real Estate Professional (according to the IRS rule) are limited to claiming a maximum of $25,000 losses per year and only if they make less than $100,000 per year. If you qualify, then you may be in a position to dramatically lower the amount of your taxes.

Some people can legally reduce their taxes all the way to ZERO!

LLCs and Rental Properties

Setting up an LLC (or other entity) provides you with the liability protection afforded by the law. Great!

But you bought the house in your own name, so you are still liable!!!

All you have to do is transfer the title from your own name into that of your LLC. Sounds simple doesn't it. In practice, it's not that complicated either. Take your deed or title that you got from the lawyer or title company at closing, and take your corporate minutes book to the county recorder's office and ask the clerk to help you transfer the title from your name(s) into the name of your LLC (or whatever). There is usually a fee involved (typically less than $30.00) for the paperwork.

And yes, before you ask, you need to go to the county where your property is located. If your LLC was established before you purchased the property, you should ask the lawyer or title company if they will do an "accomodation" at closing and do that transfer for you. If not, some people do offer a service so that you don't have to travel from your home to some far away place just to transfer the property (unless of course it happens to be somewhere warm in the winter).

Hope that helps. Now it's time to see how many ornaments I can knock off of the tree - yipee!

Smokey

Canadian transfer taxes

Thanks to one of Smokey's friends, we have a useful tool for all of you investor types.

"Hi Smokey - You have a great blog and I appreciate your focus on Canadian real estate and our market. Here is a tool that I use to calculate land transfer taxes when closing deals for my clients.

Canadian real estate calculator

All the best from Toronto, Kelly"

A Realtor has questions - we have answers

The IRS does not tax businesses according to the type of legal entity used. There is no difference between an LLC (Company) and a Corporation – from the IRS’s point of view. What the IRS cares about is the tax selection that made.

• A corporation can have 2 tax selections. Chapter “C” of the tax code or sub-chapter “S” of the tax code.
• A company can have 3 tax selections. Default (single or multi-member flow-through); chapter “C” of the tax code or sub-chapter “S” of the tax code.

In most states the costs of formation / on-going registration of a corporation or a company are the same. In those states where the costs are different, we recommend the less expensive. Unless you are planning on “going public”, issuing shares on the stock exchange, or having lots (several dozen) of employees, a corporation has more on-going paperwork than a company. How much more? About one third.

Case law to-date shows that the courts apply the law to an LLC the same way that a corporation of the same tax selection is treated.

Since there appear to be no significant legal differences between a company and a corporation (at least as far as small business owners are concerned), we recommend the simpler and less expensive entity with the appropriate tax selection for any given situation.

If, on the other hand, you want INC. as opposed to LLC at the end of your business name, then a corporation is the only way to go.

~~

Q. Doesn't all the income from a one-member LLC dump back to where it would be on a personal tax return - Schedule C with all the same self employment tax?

A. A single member LLC with the default tax selection does show up on your personal tax return to be taxed as active (self-employment + income tax) or passive (income tax only) depending on how the income is classified.

A company or a corporation with a sub-chapter “S” tax selection affords you the possibility of reducing your active income (and the resulting employment tax). The exact ratio of active income / passive distribution is something that your CPA would help you determine. Many times this reduction is as much as 50%. Your savings on this alone would be 15.3% on the amount treated as a distribution. In addition, your CPA should help you take advantage of the additional deductions that sub-chapter “S” provides to lower your taxable income even further.

~~

Q. Does the LLC relieve the licensee of liability or responsibility of the licensee for conduct or licensable activities as misconceived by many people?

A. As a Realtor® we are liable for our actions whether we are in an entity (company or corporation) or not. That’s what E&O insurance is for – unless you commit fraud or other illegal activity, in which case it doesn’t matter whether you’re an employee, owner or a professional. A corporation or a company does not provide shelter from the consequences of an illegal act. In addition, the regulatory body overseeing Realtors® at the state level also has compliance requirements e.g. Nevada requires that the agent’s name is used as the business name; California does not require the agent’s name to be used unless they are acting as a broker.

~~

As an entity formation provider, we charge the same fees whether the entity is a Partnership, Limited Liability Company or a Corporation, and whether the tax selection is defaulted or if chapter “C” or sub-chapter “S” tax treatment is chosen.

As an entity structuring provider, we provide information on the possibilities of using different combinations of entities and tax selection to achieve your wealth accumulation and liability reduction goals.

As an entity education provider, we encourage people to learn as much as possible about the consequences of their choices and how to “do the paperwork” to take advantage of their choices through our weekly and monthly teleseminar series and through reading, coaching and open discussions.

Got to go - mom says that I have an appointment - wonder what she means?

Smokey

Where should I set up my company?

"I live in California, but I'd rather not pay the taxes or the cost of doing business here." How many times do I hear that every day?

There are 2 things to consider here.

One is where is your nexus of operation.

The other is what would you pay tax on.

An S corporation or an S company is a flow through entity: all income flows down to you as W2 or distribution, so you will pay taxes on all the income in CA regardless of where you earn it.

That is because you are a CA resident, and CA reserves the right to tax residents on all income they make worldwide. If you can make a case that your nexus of operation is all over the US, you can incorporate anywhere, but you will still be taxed on all the income in CA anyway.

If you have a partner in the company who is earning outside CA, we need to talk.

A C corporation or a C company is different. And for a C it makes a lot of difference where you put it. In the C, you will still be taxed in CA on W2 income, but the company itself will pay its own taxes on profits in whatever state it is incorporated in. Big difference.

pssst - the only practical way to minimize your state taxes is to change states.

How many &!%$#*^%$ LLCs do I need anyway?

There are many ways to do anything - it just depends on what makes sense.

For Real Estate you could hold all properties in a single LLC. You would then register that LLC in each state where you have property. If a tenant sues you, they will sue the LLC that holds title to the property.

The LLC will need to defend the suit in the state where the lawsuit was brought - the state where the property is - and should be registered in that state.

You register the LLC either by forming it in the state or doing a foreign registration if it was initially formed elsewhere. I have heard an attorney suggest that you not do a foreign registration until you are sued; but if your property is in a state that takes 6 weeks to do a foreign registration even when expedited, like AZ, that's a problem.

Here's where sense comes in. You would not want to put all your property into one LLC because in the case of a lawsuit, ALL property in the LLC is at risk.

Think of the LLC as a basket. If a suit is brought against the basket, everything in it could fall to the plaintiff to settle the judgment if you lose. And in any case, all of those assets (and their revenue) gets tied up until the case is resolved.

So you need to decide how much equity you are willing to risk in a single LLC. If you are planning to buy multiple properties in a single state, the best approach usually is to set up an LLC in that state.

If you are buying one property in each of 3 states, you can form an LLC in one of the states and do foreign registrations of the LLC in the other 2. Since a state typically charges more for foreign registration than for an entity set up in the state, and you still need a resident agent in each state, this is not necessarily a good strategy for saving money.

If you plan on being wealthy, better adjust your investing tactics accordingly.

Bye for now.

Smokey

What's a Tenant in Common? Some kind of shared renter?

How should I hold my property?

When you buy a property in your own name (the only way I've found to get a loan) then the next step is to have the title (or deed) transferred from your name into the name of an entity (usually a Limited Liability Company). Of course when you do transfer the property, one of the questions that comes up is HOW to hold it! You have several choices, and they all result in different consequences. So, what are your choices?

• Tenants in Common (TIC)
• Joint Tenants with Right of Survivorship
• Community Property Estate
• Community Property with Right of Survivorship

Each of these terms has a specific implication. You need to decide which one fits your purpose (and is allowed by state law).

Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, as well as Puerto Rico use the community property system. These jurisdictions hold that each spouse shares equally the income earned and property acquired during a marriage.

In the other states, spouses generally share property under one of the following three forms of co-ownership:

1. Joint tenancy is a form of ownership that exists when two or more people own property that includes a right of survivorship. Each person has the right to possess the property. If one partner dies, the survivor becomes the sole owner. Any two people--not just spouses--may own property as joint tenants. A creditor may claim the debtors interest in joint tenancy property.
   
2. Tenancy by the entirety allowed only in some states, tenancy by the entirety is a type of co-ownership of property by a husband and wife. Like joint tenancy, it includes a right of survivorship. But a creditor of one spouse may not attach (seize) the property. Each party usually must consent to the sale of the property. Divorce may result in a division of the property.
   
3. Tenancy in common is a form of co-ownership gives each person control over his or her share of the property, and the shares need not be equal. The law does not limit tenancy in common to spouses. A tenancy in common has no right of survivorship; when one spouse dies, his or her share passes to the heirs, either by will or state laws.

Tenancy rules vary from one state to another. Some tenancies are complex and must be created in a precise manner; otherwise the courts may not enforce them.

Confused yet? When in doubt, talk to your estate and legal experts on your team.

As for me, I see someone opening a can of ... Tuna!

Got to run.

Smokey

Why Blog?

Some visitors have been curious about the blogging, so Smokey pulled some comments various sources to help explain the phenomenon.

From Wikipedia...
A weblog or blog is a web-based publication consisting primarily of periodic articles (normally, but not always, in reverse chronological order). Although most early blogs were manually updated, tools to facilitate the updating and maintenance of such sites made them accessible to a much larger and less technical population. The use of some sort of browser-based software is now a typical aspect of "blogging."
Blogs range in scope from the diaries of individuals to webpages run by political campaigns, media programs, and corporations. They range in scale from the writings of one occasional author (known as a blogger), to the collaboration of a large community of writers. Many weblogs enable visitors to leave public comments, which can lead to a community of readers centered around the blog; others are non-interactive. The totality of weblogs or blog-related websites is often called the blogosphere. When a large amount of activity, information and opinion erupts around a particular subject or controversy in the blogosphere, it is sometimes called a blogstorm or blog swarm.
The tools for editing, organizing, and publishing weblogs are variously referred to as "content management systems," "publishing platforms," "weblog software," and simply "blogware."
Blogs differ from forums or newsgroups in that only one person or group can create new subjects for discussion on their blog. A network of blogs can act similarly to a single forum in that each individual entity in the blog network creates subjects of their choosing for others to discuss; these different subjects are presented in a thread-like format on a meta-forum with no one single poster having any greater control over the content of the thread than any other. Such networks require substantial interlinking to pull off, and so a group blog with multiple people holding posting rights is more common. Because they "go first," blog owners often has control over how a subject is discussed on their blog due to their ability to frame the issue.

This Google-based tool - Blogger - has several key attributes that appeal to me.

• Inexpensive (free is good!)
• Easy to use
• Somewhat customizable (see easy to use)

Our focus supports many of the issues that our clients at Your Entity Solution, LLC have raised during the intake session as well as on-going discussions. By keeping the focus narrow, we are more likely to be interesting to the same type of readers, and more likely to have them come back.

Setting up a Blog is fairly simple - finding specific topics and content for the focus of the blog is the hard part.

Smokey has got to go now, it's off to the vet for her shots.

Bubble ?? Regional Trends tell the story

You may recall that there were significant declines in the housing values both on the West Coast and in the Northeast in the early 90’s and the gradual recovery of those markets leading up to their current highs today. Historically, the West Coast and Northeast housing markets have been cyclical (with large gains and subsequent declines in housing prices). This is in stark contrast to the more linear and stable historical price gains throughout much of the Midwest and South (where the prices for these regions are almost flat over the same period of time). The only exception to this would be the Florida market which has been more volatile historically than other markets in the South and remains that way to date.

The affordability index which computes how much a median income earner’s wages are required to pay for home ownership in a specific market are most telling. The last time the affordability index was as low for many of the areas along the West Coast and Northeast (specifically So Cal and Northeast, specifically Boston, New York City and Wash DC) housing prices plummeted upwards of 30% in some locales.

Much of the Southern California housing declines beginning in the 1990’s were attributable to the loss of defense and aerospace industry jobs starting in the early 90’s. Similar mass layoffs triggered housing significant declines in the Northeast during roughly the same time frame.

Low affordability alone cannot and does not always explain housing market behavior (think San Francisco Bay/San Diego area markets). Strong job creation and economic growth, coupled with demographic trends (think baby boomers), availability of developable land and finally macro-economic forces (interest rates still as 35 year lows) also factor in considerably in a specific housing market’s behavior.

Yet affordability remains one of the strongest indicators of a housing market’s behavior and overall health historically and moving forward.

For details and lots of numbers, visit the PMI Trends

Canada, Eh? How much can an igloo cost?

Smokey is concerned that many of her readers may have incorrect opinions about America's northern neighbour as it relates to real estate (and lots of other topics as well). In the finest Don Quixote tradition, here is her attempt to bring some real numbers about real estate from the Atlantic to the Pacific on the Canadian side of the border.

Residential real estate prices have continued to climb across Canada with the hottest markets in the West being driven by the energy boom, according to a third-quarter 2005 survey by Royal LePage Real Estate Services Ltd.

"It's incredibly busy," said Elke Babiuk, a real estate agent at MaxWell Canyon Creek of Calgary. "We're supposed to be in the slow period of the year, but it's not happening."

People are attracted to Calgary, she said, where there are job opportunities, house prices are moderate and, as an added bonus, there isn't any sales tax.

The average price of a house in Calgary ranged from $252,411 to $264,389, according to the survey.

"High energy prices are fuelling sizable gains in the mid-western provinces; however, most of these markets have only started to experience significant above-average growth in the past few quarters, and as a result, prices remain relatively affordable," said Phil Soper, president and chief executive officer of Royal LePage Real Estate Services.

But there could continue to be upward pressure in prices. "Builders cannot and will not build to satisfy short-term demands," Mr. Soper said. There could also be a shortage of skilled trades for construction and even materials, he added.

Meanwhile, rising inventory levels have slowed the pace of growth in major metropolitan centres such as Toronto, Montreal and Vancouver, which have seen some of the biggest price increases nationally, according to the survey.

The average price of a two-storey home in Canada increased 6.7 per cent to $324,066 from a year ago. The average price of a bungalow was $265,405, up 7.4 per cent, while the cost of a standard condominium increased 6.8 per cent to an average price of $185,195.

In Toronto, the average price of a two-storey house increased 4.8 per cent to $459,250 while a detached bungalow climbed 6.4 per cent to $364,111 and condo prices registered a 3.6-per-cent gain to $242,664.

Markets east of Manitoba, except New Brunswick, continue to experience slower growth than in the West.

Winnipeg is one of the hottest markets in the country, with double-digit price increases in all three housing types, despite rising inventories.

"We're selling them in days instead of months," said Jim Van Wyk, the owner of Elite Real Estate Inc., an independent real estate agent in Winnipeg.

The market is being helped by a strong economy, population growth and low interest rates, he said. "Winnipeg is also playing catch-up."

The average prices of a two-storey home, a detached bungalow and a condominium in Winnipeg were respectively $179,875, $191,571 and $95,667, according to the survey.

Double-digit house price increases were also recorded for Saint John and Moncton.

For the third consecutive quarter, Victoria showed the largest price increases in Canada with condominium prices increasing 31 per cent to $220,000 as baby boomers look for a place to retire with good weather and scenic views, said Royal LePage Real Estate Services. The price of an average detached bungalow increased 18.4 per cent to $348,000.

The residential real estate expansion has continued for more than five years and "there is little evidence of an economic bubble in any of our major cities," Mr. Soper said.

Strong summer activity

'Robust economic conditions' fuelled strong growth in average housing prices in major markets across Canada, a report by Royal LePage says. The numbers show average prices for two-storey homes in the third quarter of 2005, and the percentage increase over the same period in 2004.

• HALIFAX: $173,333, up 6.9%
• CHARLOTTETOWN: $141,000, up 3.7%
• MONCTON: $127,000, up 18.7%
• SAINT JOHN, N.B.: $142,900, up 14.9%
• ST. JOHN'S, NFLD.: $142,667, up 7%
• MONTREAL: $203,688, up 5%
• OTTAWA: $271,429, up 4.2%
• TORONTO: $364,111, up 6.4%
• WINNIPEG: $191,571, up 10.9%
• SASKATCHEWAN: $156,083, 8.2%
• CALGARY: $252,411, up 7.9%
• EDMONTON: $194,857, up 9.1%
• VANCOUVER: $499,667, up 8.8%
• VICTORIA: $348,000, up 18.4%

Vive la Difference - real estate in Québec

Completing a real estate transaction in the Province of Québec is generally similar to completing a deal in any other Canadian jurisdiction, except for certain conceptual differences. In practice, this results in the use of some special terminology and a few unique procedures, but mostly the same result is achieved. Québec has responded well to the influence from the rest of North America and its legal system, which is a mix of civil law and common law tradition, can accommodate all the latest structures.

The Civil Code of Québec is the law of general application and governs relations between persons and property. Non-residents are free to purchase real estate in Québec and are subject to the same general restrictions as residents in regard to the purchase of agricultural land and designated cultural properties.

Most real estate transactions involve a review of title, the obtaining of an up-to-date survey and, in some cases, the obtaining of title insurance. Conveyance deeds may be either under private signature or executed before a Québec notary. Québec has a graduated land transfer tax duty, subject to a variety of exemptions, including for related companies.

In Québec, a mortgage is called a hypothec, an easement is called a servitude, a ground lease is called an emphyteusis or emphyteutic lease, real property is called an immovable, a survey is called a certificate of location, an air right is called a right of superficie and a condominium is called a divided co-ownership.

Mortgages are called hypothecs in Québec and must be signed before a Quebec notary if real estate is involved. Québec has a modern central registry system for hypothecs on personal property, leases and conditional sales agreements in which filings and searches can be completed electronically. There is a separate land registry system for title to real estate and hypothecs on real estate. Like other Canadian jurisdictions, Québec has certain fundamental rules which are of "public order" and cannot be waived by the parties. However, in most commercial contexts, the rules of the Civil Code of Québec may be deviated from if desired by the parties.

There is no division of legal ownership and beneficial ownership in Quebec as there is in the common law. It is often the practice in Quebec to register title to real estate in the name of an agency or nominee company and have the nominee enter into an unregistered agency agreement with the beneficial owners. In this way the nominee, even though it is the registered owner, is not vested with any right of beneficial ownership.

Québec law can accommodate all the sophisticated and complex structures being used elsewhere in North America. Indeed, many non-residents own or participate in major development projects in Québec such as shopping centres, office buildings and industrial and multi-residential developments. Québec law can and has accommodated income funds, REITS, trusts, limited partnerships, monetizations and securitizations – all with the usual "joie de vivre" and a few special touches to preserve Québec’s cultural identity.

More information can be found here.

Transfer Taxes in Canada

The transfer of real property is subject to a land transfer tax in most, but not all, provinces in Canada.

Land Transfer Tax

Where these taxes are payable, they are payable by all purchasers (subject to certain limited exemptions), whether the purchaser is a resident or non-resident of Canada. The tax is calculated by applying a graduated tax rate to the total value of the consideration paid for the property.

For instance, in British Columbia, the tax is 1% on the first $200,000 of fair market value and 2% on the balance. For commercial properties in Ontario, a rate of 0.5% is applied to the first $50,000, a rate of 1% to the value of consideration higher than $50,000 but not exceeding $250,000 and a rate of 1.5% to amounts higher than $250,000. Québec has similar land transfer tax rates to Ontario, while Alberta has no land transfer taxes but imposes registration fees to transfers at a rate of just 0.1% of value.

Goods and Services TaxIn Canada, a goods and services tax ("GST") is payable upon a supply of real property, unless otherwise exempted, under the Excise Tax Act. This includes the sale of a property, as well as a lease, license or other similar arrangement. GST is a value-added tax of 7%, except in the provinces of Nova Scotia, New Brunswick and Newfoundland, where the equivalent tax is 15%.

Registration under the Excise Tax Act for GST is mandatory for every person who makes a taxable supply in Canada in the course of a commercial activity except in certain limited circumstances, including where the taxpayer is a non-resident who does not carry on any business in Canada or where the taxpayer’s only commercial activity is making supplies of real property by way of sale, other than in the course of a business.

Generally, it is the "supplier" (the seller) that is obligated to collect GST from the "recipient" (the buyer) of the real property. However, the buyer may be responsible for paying and remitting the GST in situations where the seller is a non-resident person and the buyer is registered for GST purposes.

If a purchaser or tenant is required to pay GST on a property, it may be able to claim input tax credits for the tax paid, which permits the taxpayer to apply for a refund of GST. Input tax credits are only available to purchasers or tenants who are registered for GST purposes and who acquire a property for commercial purposes.

Withholding Tax

A non-resident seller of real property in Canada should be prepared to provide to a purchaser a clearance certificate from Canada Customs and Revenue Agency ("CCRA"). Otherwise, a purchaser may hold back from the closing funds a withholding tax on behalf of CCRA, regardless of whether this has been agreed to in the contract of purchase and sale and regardless of whether the seller owes tax or qualifies for an exemption.

In order to ensure that a non-resident seller pays Canadian tax owing on the disposition of taxable Canadian property (which generally includes all real property), a seller is to report the transaction to, and obtain from, CCRA a clearance certificate for the taxes potentially owing as a result of the sale transaction. If a seller fails to comply, a purchaser may potentially be liable for the tax under s. 116 of the Income Tax Act. Accordingly, a purchaser may holdback from the closing proceeds an amount equal to 25% or 50% of the purchase price.

On a practical level, purchasers generally hold back 50% as it may be difficult for a purchaser to ascertain whether a seller holds real property as capital property or as inventory (being the distinction between the percentage amounts to be withheld).

The purchaser is obligated to remit these amounts to CCRA within 30 days after the end of the month in which the property was acquired. A seller should keep this time frame in mind if it is not able to deliver a clearance certificate until after the closing date.

More details can be found here

Canada. More about the next great (?) investment opportunity

Many of Smokey's friends are looking for good opportunities to invest outside of the US. Recently some parts of Canada are showing up on the radar screen. Rising energy prices are making some of Canada's oil reserves financially recoverable. The "Tar Sands" at Lake Athabaska have been recently been touted as "the answer" to America's independance on foreign oil, although they haven't proven to be so in the past half-century or so.

Forget about the fact that Canada is a sovereign nation (so I guess it qualifies as foreign), there are other energy issues as well.

There are also real estate opportunities in Canada as well. Of course there are issues that a savvy investor should be aware of before jumping in with both feet.

Financing is one of them

Americans can borrow from Canadian banks and vice versa. But trying to finance Canadian property with U.S. funds becomes difficult. Location, security in the property and ability to enforce simply make the package unattractive to most U.S. lenders.

And, if you do choose to buy and borrow Canadian, don't expect to see the loan options available here. The interest-rate structure could be as different as the locale, and the pricing may not be as favorable as you might expect. Owner financing, or "carrying the paper," is also available.

Many folks "from the states" are drawn to Canadian property during the summer months for a variety of reasons, but the big bargains brought by a favorable exchange rate are not as big as they once were. A U.S. buck can now bring approximately $1.18 in Canadian goods, down significantly from years past.

Most Canadian conventional loans are written with a 5-year term. There are some 7- and 10-year options available but the most popular loans right now are 6-month, 1-year, 3-year and 5-year loans (comparable to our adjustables and known as "open"), each typically amortized over a period of 25 years.

"Open" does not mean the borrower's monthly payments adjust as the monthly market fluctuates; it means the borrower can prepay the loan at any time. Borrowers pay more for an open loan. Fixed-rate loan rules only allow for prepayment once a year. When a loan reaches its term, the lender usually renews it.

Shorter loan terms encourage borrowers to consider paying off loans as soon as possible, giving the consumer more of a stake in the property. This accelerated equity makes more sense to Canadians than it does to U.S. taxpayers because Canadians are not able to deduct home-loan interest from their taxes. For some American consumers, the mortgage-interest deduction is the only major write-off available.

Americans face two large issues when investing in real estate abroad. First, you have the appreciation or depreciation of the real estate itself – or the "property side" of the decision. You then have the currency risk when you sell the property and bring the money back into this country. If the Canadian dollar slides, you run the risk of losing money on that investment. However, if the Canadian dollar improves against the U.S. dollar, your investment suddenly rises significantly.

Also, research the capital-gains ramifications if you expect to execute a tax-deferred exchange. You may be able to rent the getaway – especially if it's in a popular location such as Vancouver Island or Whistler, B.C., but the U.S. tax-deferred exchange rules do not qualify when trading for properties in other countries.

With investment property in the United States, you can defer your capital gain if you buy a "like kind" property of equal or greater value than the one you sold, provided you identify it within 45 days and purchase it within 180 days from the day you sold the first property. The Internal Revenue Service says any property outside of this country is not "like kind" so no capital-gains taxes can be deferred.

Many investment advisors say that folks looking to purchase property abroad – for investment or a principal residence – often refinance or take out a home-equity loan on a property in the U.S. and pay cash for the "offshore" home. That way, all financing questions are eliminated and the interest on the home-equity loan or refinance often is tax deductible.

Smokey will be talking about entity structuring and how you can use it to your advantage when doing cross-border investments in a little while.

Bye for now.

Taxation without representation?

Whatever happened to the founding principles?

Smokey was shocked to see the following...

Charlotte Observer, The (NC) (KRT) via NewsEdge Corporation :

Oct. 5--Bo Horne of Seneca, S.C., sold a $695 software program to a New Jersey casino eight years ago.

Now, the N.J. Treasury Department says Horne must pay $600 in corporate income tax and fees each year for as long as the casino uses the program -- even though Horne says he's never collected additional revenue from the one-time sale.

As states across the country cope with budget shortfalls, an increasing number are turning to out-of-state companies to boost corporate tax revenues, according to a study released Friday by the Tax Foundation, a Washington, D.C., think tank that advocates lower taxes.

Companies that have fleeting contact with certain states may find tax bills in their mailboxes years later, says Chris Atkins, the study's author.

The trend is occurring in part because state officials are finding it easy to hunt for revenue from out-of-state firms because "there's no political price to pay," Atkins says.

Horne's case centers on New Jersey's interpretation of his connection with the state, or nexus, as it's called in tax law. Most states require companies have a physical presence, such as a building or employees, to establish nexus -- and the right to levy taxes.

An increasing number of others, including New Jersey, North Carolina and South Carolina, now say providing a service in their state could be enough to trigger income tax liability.

A N.J. treasury spokeswoman said Horne must pay corporate income tax because his software is an "intangible asset" and gives him a significant enough presence in the state to pay the minimum annual corporate income tax of $500 a year, plus fees.

"It's a sleeper issue for small businesses," says Horne, owner of ProHelp Systems, Inc., which he runs out of his basement with wife Katherine. "States can make your life miserable, if they choose."

He worries such aggressive tax collecting will chill commerce, particularly for small businesses. He's stopped doing business with N.J.-based customers.

It's easier these days for states to track multi-state sales because more government agencies use electronic databases. Such activity could go undetected years ago.

Last week, Horne testified before a House subcommittee in support of a bill that would prevent states from applying income tax to businesses that provide a service but don't have physical assets located there.

The bill, the Business Activity Tax Simplification Act of 2005, has 30 co-sponsors, including three S.C. representatives. No N.C. lawmakers have signed on.

The Carolinas helped birth this trend of applying corporate income tax to out-of-state service providers.

In a 1994 landmark ruling, the S.C. Supreme Court ruled that the taxpayer's physical presence isn't required for the state to levy income tax.

This fall, the U.S. Supreme Court is expected to decide whether to consider an appeal from a similar N.C. ruling. Both cases are often cited as precedents when similar lawsuits are brought up around the country, those familiar with the issue say.

Today, South Carolina levies corporate income tax on a case-by-case basis, said spokesman Danny Brazell. For example, if an out-of-state mortgage lender had one S.C. client, they probably wouldn't be required to file income taxes, he said.

But if that same company had 50 clients and ran radio advertisements, they probably would, he said.

Brazell said the state levies the tax to even the playing field between out-of-state corporations that make money off S.C. sales, and in-state companies that pay property tax and contribute to the community.

"Certainly, there's an issue of what is fair," he said. The state collects an average $8 million annually from out-of-state companies, roughly 5 percent of total corporate income tax revenues.

In a decision that bodes badly for Horne, a N.J. appellate court ruled last month that out-of-state companies with no physical presence in the state can be taxed on sales of their licensed goods.

For Horne, who enjoys fishing on Lake Keowee and visiting historical sites, that decision, if it ultimately stands, could cripple the country's economy.

"If you sell someone in New Jersey a box of paper clips you'll be hit with a $600 tax," he says. "This just destroys small business."

Accredited Investors

A lot of people have questions about some really "neat" investment opportunities that they may have heard about - you know the kind, the ones with 35%+ ROI!

And somewhere in the fine print it says that you must be an "Accredited Investor". What the heck is that all about?

Well, the Securities Exchange Commission was established (among many other things) to minimize the number of disreputable investments being offered to the general public. As such, any investment being offered has to follow some clear reporting requirements and register with the appropriate departments before being allowed to offer the investment. The resulting scrutiny has worked very well to reduce the number of "scams" that were floating around.

On the other hand, some investors want to test their skills and luck by finding opportunities that have spectacular rewards to go along with the spectacular risks. Usually, these opportunities only have a short window for investment, and as such, don't really have the time to go through all the SEC processes. In response to this demand a designation (and associated disclaimer) was created, that of "Accredited Investor".

Simply stated, an accredited investor waives their right to whine about "losing it all" if the investment opportunity doesn't pan out - for any reason.

So, Smokey Says that if you want to play in the unregulated marketplace make sure you understand the risks and are able (financially and emotionally) to survive the fallout if your choice doesn't return the "pot o' gold" you were wishing for. Be aware that you are the one responsible for "self-declaring" your status. No one else cares about your money as much as you.

The details of the SEC information are reproduced below.

Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D, a company may sell its securities to what are known as "accredited investors."

The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:

1. a bank, insurance company, registered investment company, business development company, or small business investment company;
2. an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
3. a charitable organization, corporation, or partnership with assets exceeding $5 million;
4. a director, executive officer, or general partner of the company selling the securities;
5. a business in which all the equity owners are accredited investors;
6. a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
7. a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
8. a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

For more information about the SEC’s registration requirements and common exemptions, read our brochure, Q&A: Small Business & the SEC.

Flipping houses?

Many investors buy run-down houses, fix them up and sell them for a profit [a happy day]. Is that called a flip? Well, if it takes less than a year and a day we call it a flip. The time frame determines the tax strategy. Longer than a year and a day would be taxed as long term capital gains (15% in 2005) and you would be able to claim some depreciation.

Any shorter time frame falls into short term capital gains which are taxed at your highest income tax rates as active income and there is no depreciation >groan<.

One way to manage your taxes would be to separate this income into active and passive portions through the use of a Limited Partnership (LP). Since an LP does not exist alone, but needs to have a General Partner (GP), you can decide how much goes to the GP and how much goes to the LP. The LP only receives passive income and the GP receives active income (by IRS definition). Frequently the GP is a "C" company or corporation and would only take a small percentage of the profits as compensation for managing the partnership. One GP can manage many different LPs, so an investor can partner with many different groups and "re-use" the same GP.

As the GP accumulates cash (as a "C" it only pays 15% on the first $50,000 net income) it is able to invest as its own person since a "C" tax election is the only entity that files its own tax return and can act as a separate legal "person".

Somebody find a brush - I'm shedding all over the keyboard. Bye for now

Keep your home after disaster strikes

Fresh from MSN Money.

The feds urge mortgage lenders to cut homeowners some slack during crises, but there's no guarantee.

Two keys: act quickly and stay in touch with your lender.

The storm is over. You're safe. So is your family. But your life will never be the same.

And for many people, unless they take the difficult step of dealing with what previously seemed like mundane day-to-day financial realities, things could get worse.

This is certainly the case for hurricane-stricken homeowners with mortgages. These Gulf Coast residents must continue to make monthly payments on badly damaged, perhaps destroyed, residences.

Homeowners who don't make their expected payments could, at best, face added costs from late-payment fees and see their credit ratings damaged. At worst, they could lose their homes before repairs or rebuilding even starts.

But you can forestall such financial fallout. The key: You've got to initiate the process and stay in close touch with your mortgage lender.

Leniency recommended

"It's not realistic to expect people to think about sending a check when they're sitting in a damaged home with no electricity," says Terry W. Claus Jr., president of Miami-based Home Financing Center

That's especially true in cases as extreme as Hurricane Katrina, where many homeowners also are facing the loss of regular income because their employers are gone.

Federal banking and housing agencies are aware of the challenges and have put out the word to lenders that accommodations should be made.

The Federal Deposit Insurance Corp. notified institutions under its supervision that it will grant leeway for "prudent efforts to adjust or alter terms on existing loans in areas affected by the hurricane and storms.

Read the whole story here on MSN Money.

Please pass this on to anyone with friends or family.

Smokey says - keep safe.

The IRS are coming - run for the Hills!

Or maybe not.

According to Diane Kennedy the IRS has started a pilot program to examine compensation taken by shareholders of S Corporations. The problem is that too many S Corporation owners don’t take any salary at all. That way all profits run through to them in the form of a distribution and they are able to avoid payroll taxes.

Seemed like a good idea at the time, right? Well, the IRS is on to it!

In fact, if you don’t take any payroll from your S Corporation, they are now changing all of the distribution into payroll – and charging penalty and interest.

The best defense is (1) pay yourself some kind of salary. In this case, it is much more unlikely that the IRS will attempt to change all of the distribution into salary. And, (2) draw a reasonable salary from your S Corporation.

What is a reasonable salary? It’s the amount you’d pay someone else for the work you currently perform.

There is one more strategy to calculate the amount of salary – it’s to first calculate how much a reasonable return from your investment in the S Corporation should be. The difference between taxable income and the reasonable return on investment would be your salary amount. Generally, the return method of calculation means a much higher distribution and lower salary. And, that means less tax.

Read more about the details here.

so... as I always say, pigs get fat and hogs get slaughtered - don't be greedy and you'll do just fine.

Oh oh, here comes that dog again - gotta run

The ultimate tax shelter: Owning your own business

Jeff Schnepper was just telling me that the surest way to reduce your taxes is to convert personal expenditures into allowable deductions. Turn even a hobby into a business and you'll cut your tax bill.

The No. 1 way to reduce your taxes with a smile is to convert your personal expenditures into allowable deductions. Turn yourself into a business owner and cut your taxes.

It’s almost that simple.

Moreover, even if you’re employed full time elsewhere, that doesn’t prevent you from having another vocation on the side. This technique works whether your business is your primary source of income or it’s a sideline.

Your hobby can be a business. That means your hobby could qualify as a business. In the process, you’ll cut your tax bill.

Here’s the best part: Your business doesn’t have to make a profit for your expenses to be deductible. All you have to do is establish a “profit motive.” Under the Internal Revenue Code, a “profit motive” is presumed if you earn any net income in any three out of five business years.

Read the full story here

Well, that was exciting! I think I'll just stretch out here on the keyboard eif4[cw948955j49tp9m oops. 'Bye for now

Income Splitting

This tactic is a great way to eliminate self employment taxes (currently 15.3%).

Scenario: You are a self-employed person (plumber, realtor, chiropractor, etc.) operating as a sole proprietor.

Situation: You declare your income (say $60,000 after business deductions) as 1099 (as opposed to a wage earner's W2), and then pay self-employment taxes of $9,180 in addition to the state and federal income taxes levied.

Solution: Set up a Company or Corporation with an "S" tax election. This allows you to become a W2 employee of your Company or Corporation and take part of your income as W2 and part of your income as a Distribution.

So what? Well, you don't pay any employment taxes on Distributions! Lets say you pay yourself in wages what you would pay someone else to do your job, and that works out to be about 50% of your total income, and you withdraw the balance (50%) as a distribution. That means that you don't pay employment taxes on $30,000 or in other words, you save $4,590 in taxes!
oops, there goes a dragonfly by the window - got to run

Good thing I already work in Nevada

Good thing I already work in Nevada!

According to a recent article in the LA Times, California businesses are incorporating in Nevada, where there is no income tax. State officials call it fraud and vow a crackdown.

“Forget complicated wire transfers to the Cayman Islands or secret Swiss deposit boxes. Californians who want to hide their money from tax authorities are increasingly opting for a simpler alternative: socking it away just over the state line.

No need for savvy accountants or high-priced lawyers. Seminars, web casts and radio advertisements bray that it's easy to slash a California tax bill — or eliminate it altogether — by creating a corporation in Nevada, where there is no income tax on businesses or individuals. Set one up online with a few keystrokes and a $395 credit card payment! For a little extra, a Nevada mailing address, telephone number and bank account can be added.

Promoters peddling the packages call it good tax planning.

California officials call it something else: tax fraud.
They say the cash-strapped state's coffers are being drained as even some of the smallest California businesses shift their profits into hastily created corporate shells in the Silver State.”“We want to catch this scam before it gets out of hand," said state Controller Steve Westly. "We think it will cost the state tens of millions of dollars if this continues.”

Here is the full story.

At Your Entity Solution, we don’t think that a Nevada Corporation is necessarily the only, or even the best answer to setting up a legitimate company structure that addresses your need to manage your tax burden and protect your assets from unwanted liability.

Don’t forget – if it seems too good to be true, it usually is.

Bye for now, time for a nap.

Smokey Says - don’t take any rancid tuna.