Working Capital The Real Estate Podcast
Cross-Border Real Estate Investing with Chris Picciurro|EP27
Nov 11, 2020
In This Episode
Chris Picciurro has been a CPA for more than 20 years, and spent the last 16 years as founder and executive officer of Integrated CPA Group. Since 2003, Integrated CPA Group has grown from a small, one-office operation to a multi-state firm servicing well over 3,000 clients. He is a member of the ProConnect™ Tax Customer Council.
In this episode, we take a deep dive into the tax and liability issues in real estate. Topics include foreign investors investing in the US, LLC formation, tax planning and growing your real estate assets. Enjoy.
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Welcome to the Working Capital The Real Estate Podcast. My name is Jessica Fragale. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you’re looking at your first investment, we’re raising our first fund. Join me and lets build that Portfolio one square foot at a time. Okay work in capitalists. We have a special guest. Today is Chris Picciurro. Chris has been a CPA for more than 22 years and spent the last 16 years as founder, an executive officer of Integrated CPA group since 2003 Integrated CPA Group has grown from a small one office operation to a multi state firm servicing well over 3000 clients and taking one look at your LinkedIn.
Chris a CPA MBA PFS a R M I D I E. How are you doing today?
I’m Awesome. And so I’ve been doing this CPA for 22 years. So I was the youngest person a pass. I was nine years old. So duty house or the seat? No, I’m just kidding. When Moses was working for a half. Exactly, I am. Awesome I appreciate being on your show. I was able to catch some episodes today and I originally from Detroit where I live down here in the Nashville area now, and I miss I’m a lot of my Canadian friends and I’ve have fond memories of Ontario. I actually got engaged in Niagara falls and, and then I went to Windsor in Sarnia to many times, but that’s before the CPA license will leave that out
Jesse (1m 31s):
Right on. Yeah. So your only a few hours away. So for listeners today, especially, you know, the Canadians Australians, ah, you know, the other is across the pond and in Europe, what was so great. And the reason I wanted to have you on was that you were an, are an expert in foreign investment into the US and you know, sometimes eyes can glaze over when we’re talking about liability, legal taxes, but it’s important stuff. And I’m so happy you’re here so we can have this conversation.
Chris (1m 60s):
Yeah. I’m excited about it. And we have, so what we’re CPA from where we are, we have a niche in helping real estate investors and entrepreneurs. I would say they kind of go hand in hand. Many of our, our foreign nationals are entrepreneurs in their, in their native country and accumulated some assets and wealth. And we were going to talk about why that, why people invest in the United States. But so yeah, we have a lot in common and we just, you know, starting at about 12 years ago, I’m really getting into follow a lot of us. If we go, we got in a firm for 18 years, by 12 years ago, we really started falling into helping real estate investors, specifically foreign nationals, our tax code, unfortunately calls them on an alien, which I don’t like that term.
Chris (2m 50s):
But, but yeah, it’s something for sure, especially, you know what I know, but, but we’ve had, you know, we’ve worked with the over the years, worked with clients in over, over 30 countries. So that’s been pretty cool and yeah, and we’ve worked with a lot of work. A lot of what we started doing this is about 12 years ago and creating, continuing education opportunities for the national association of realtors, national association of residential property managers. And just from their creating that those CEOs, we are able to help those trade organizations with the tax compliance and then essentially helping the investors with a strategy and planning.
Jesse (3m 31s):
Wow. So that’s fantastic. And you know, before we get into everything right now, why don’t you tell the listeners a little bit about your background and you know, how you initially got into real estate and specifically the vertical of accounting and taxes that you’re in now?
Chris (3m 47s):
Yeah, well, I was, I always like to numbers and I just, I was one of those people that I wanted to be a CPA back in, even in high school. Like I said, a lot of, well, once I realized I wasn’t going to be on the Detroit tigers, I realized I had to find another opportunity, which was pretty, pretty young. So, so about ninth grade, I started realizing that I really love numbers. I love accounting. And I tried, you know, I, I worked at other, a CPA practice is before I started my art practice. And I just know he had an entrepreneurial spirit and I knew that I wanted to, you know, I, and I try to mentor some of the younger CPA’s now that are just kinda trying to grow their businesses. And my, my kind of took on my own advice so that we always say, when you eat our own cooking and I love real estate, I love it.
Chris (4m 31s):
I, I, you know, involve myself in investing in real estate. And I just felt like if you really, if you’re a professional service provider and you want to love what you do, you wanna do your hobby for work, then I go in the industries that you really love. So I just got into that, a couple of that. What by w we have a kind of an internal, a saying here in our firm to make like your best client think your next client. So all of these clients were in real estate and they are referring us and then referring us to their investors. And, and I love travel too. And we kind of a neat thing is that even though I’m, I haven’t been at all 30 countries so that we have clients in, I feel like I love meeting the people from different countries and not just myself. We have an awesome team of people that, that we, you know, sometimes we zoom meet with them.
Chris (5m 17s):
Sometimes they come to the States and, and in person and a meet with them. But when I say me, sometimes there’s just a talk like this, but you get to know them. And we are able to, I love the different cultures. I just love finance. So it just, it was, it was a fun niche to get into. So we have, we have a, we have a domestic practice and then we have, and be an international practice. So in the international practice is specifically what we call inbound Tax. So it’s, it’s the people that are foreign nationals. Investing here in the United States where most firms focused on US-based companies that are, that are investing overseas and there’s just, you know, so, so that’s kind of our, our differentiating factor.
Chris (5m 59s):
Jesse (5m 60s):
Okay. Very cool. So you initially got involved into real estate and you’re an investor yourself. You, you buy it at real estate out of curiosity, what type of a, you know, what asset class do you do you like to invest?
Chris (6m 12s):
So we have had a commercial property that, that was a typical, usually just offices that we operate at our practices out of. So myself personally, I like I’m a single family homes. I’m I just feel like they are easy to sell I’m they, you know, that obviously they have in here challenges and, and, and I’m very past that. So I always, I had personally employed third party property managers in, in general, and then a lot of cities usually that you can do it. We’re always trying to get at least a 1% rule and we want, we want to make sure
Jesse (6m 47s):
That the Americans unbelievable.
Chris (6m 50s):
We wanted to, so Toronto wouldn’t be a good spot to the us. So we were looking to, you know, to, to make sure that the, that the laws are a favor of a landlord and, and stuff like that. So I, and honestly I’ve learned so much from clients, it’s it ’cause, you can be like my old job as to legally and ethically to reduce the taxes, to pay in your lifetime. So when I have clients that are like, you actually, you know, obviously we implement cost segregation studies and do different strategies, whether it’s, you know, 31 he says and all that. But, but yeah, when I see the cashflow is coming out of some of these markets, I’m like, okay, I see it, that I got to go. So, yeah.
Chris (7m 30s):
Jesse (7m 31s):
You know what, that’s funny, you mentioned that I, I, we, we have a monthly meetup for a foreign investors. It’s typically Canadians investing in the us, and we were talking with some operators in Buffalo. And when, you know, they say the cap rates out there were usually like, come again. W what was it, what was that number? Just because they’re so hard to achieve, unless you’re going to super a tertiary markets in a way in Canada butt. So, you know, maybe you could take us, you know, 30,000 foot view of it, a little bit of the background of how the us S treats foreign investors when they’re investing outside of the us in real property, income producing property in the States.
Chris (8m 10s):
Yeah. Well, I, I feel that our tax code, so our big picture of the us tax code does, does one or two things. It rewards certain behavior and it deterred a certain behavior. So it rewards in general real estate investing its one of the few industries that you can be in that you can have, we call it a positive cashflow in a zero tax flow. You know, there’s not many places that you can do that. So a lot of the tax benefits. So we have, as you, as techs, you asked the residents and, and I said, I should probably start by saying the us tax resident a foreign national would happen as well. The rules are really interesting. You can be for instance, a US tax resident for income tax purposes, but not for estate tax purposes and vice versa.
Chris (8m 54s):
So, so, but in general, the room, the rules are very favorable. I’m one of the, and then, and then the next thing you have to look at it is, okay, what, what country is the foreign national from? Is it a Tax TD treaty country or is that not a tax treaty countries in general, a tax treaty countries are going to be an ally or someone that this country, the United States plays nice with us and Canada. It was our, probably our best to ally. And, and so the issue, and then when you start working with a lot of clients from that country, you, we do have to develop your network. You know, so we, we do, we do the tax planning, a strategy. We have to develop the lending side. We had to develop relationships with the legal side.
Chris (9m 35s):
And also I’m not an expert in prevential and, and Canadian tax returns, but we have to know the interplay between the tax credits there. And, and just understanding that in theory, you wanna have a positive cash flow and you want it to make sure you are not subject to the double taxation when we are in. And one of the things that I always talked about is to reduce the taxes you put in your lifetime, that also includes the income taxes, but it also includes the state tax and an understanding what the rules our here versus, you know, what the rules are they in other countries. So I would say specifically for Canada, it was very favorable and that’s why we’re seeing us. I mean, I want to say from Oh eight Oh nine, all the way that probably about 12 or 13 Canada represent the largest percentage of foreign national investment here in the United States.
Chris (10m 26s):
They don’t have it in front of me for a variety of reasons. I mean, you know, the, the loony and a dollar, right? I, they were like R M and M for a while, but you know, growing up its been 1.5. So we’re at 1.6 to one. So when the, when, when our real estate market really came down and in the Canadian dollar was strengthened to the us dollar was a great weekend. That’s where we saw a lot of investment, you know, because we are looking at, I mean, I was thinking about the example. I mean, where does everyone go? And from Canada to Hallandale beach, right? Aren’t they all are a lot of clients. There are a lot of clients that I, if you’re from Vancouver, you are probably going to Arizona.
Chris (11m 6s):
It’s just, it’s weird to see these patterns. And, but yeah. So lets say they buy all kind of a Florida that, that kind of it could have been, it could have been $400,000 US which you would have been 600,000 Canadian. The kind of goes down to 200,000 when we hit the skids and now it’s 200,000 Canadian. So it’s on, you know, one third, the price, not only that they can also rent it out and pretty much covered our whole nuts right now, once they start running out, running out the property, there is a lot more tax compliance to consider, but, but that’s kind of a landscape. So the Canadian Canadian investor’s you have a lot of advantages here. The one, if I have one take-away you should be very aware of though, is that the CRA Canadian revenue agency?
Chris (11m 54s):
They don’t. So LLC is our very popular, popular in the United States limited liability company. Yeah. But people will think it stands for the limited liability corporation and the corporation, but it’s a limited liability company. The Canadian, the CRA does not recognize it as a US LLC as a transparent entity. Okay. So what happens is, is you might get double taxed. So a lot of times investors are coming over here and they might come to an event, were people, you know, turnkey rental property sale event. So I mean,
Jesse (12m 24s):
In a row says you must get an LLC. Right,
Chris (12m 27s):
Exactly. So based on, you know, their situation now, obviously you have to consider asset protection, a state tax, et cetera, et cetera. Or when we were seeing it is unfortunately a Canadian, a national would by a property here, putting it in an LLC. And now we have a bunch of tax reporting here that the yellow I’ll say it has to file a corporate tax return here. Yeah. And you have to file a personal return. You’re still have to get an ITIN and you are not even getting the tax credit in Canada for your US tax because of the CRA. So there’s workarounds. Sometimes you, you know, and then I’ll see you here. It might elect to be taxed as a core to avoid the double taxation. And that has just been against the state taxes.
Chris (13m 9s):
But again, I have some not going to be in the weeds too much. Its bottom line is you’ve got to, you’ve got to diagnose prescribe, right? We’ve got a look at the client’s situation and, and figure out what the best is. Always better do structuring before you buy. But usually yeah,
Jesse (13m 24s):
It usually it’s an afterthought. So if we, you know, if we go and so I do, I wanna talk about LLC has limited partnerships. I wanted to get into that, but why don’t we go from, you know, eh, I’m a visual guy and, and this is, you know, audio. So let’s, you know, for me the best visual is a, is a bit of a case study. So let’s talk maybe one of the most, the most basic examples that we could do it. You have an individual who is for whatever reason, not worried about liability protection is buying a single family home to rent out in the us and he’s going to own it in his personal name. Okay. Okay. It’s tax time or even, or even before that he has income coming in, you know, what are his implications?
Jesse (14m 5s):
Withholding tax the such and such.
Chris (14m 8s):
No, this was great because we did this case study and now we built it out a way you had the opportunity to go with one of our clients to Montreal, Toronto, Vancouver. I actually went to Edmonton for like four days, which is pretty cool a while ago. So that way, so yeah, we, we, we did as a Canadian US example. So
Jesse (14m 25s):
Yeah. So I guess one way in addition to this would be correct me if I’m wrong in this example, the answer would probably just cause its still a personal and we’re not talking LLC as yet, this can be an Australian. Right. This could be anybody that we have it or you have a tax treaty with. Right.
Chris (14m 40s):
Right. So let’s say, yeah. So let’s say you were a Canadian national, it can be Australian, but Canadian national specifically with the LLC rule, you’ve come here, you buy a property in your own name. Do you do you, you don’t have asset protection. That might not be a concern of yours because you, and I’m not an attorney, but you’re going to have a property management company. Are you going to have property insurance, et cetera, et cetera. The first thing is your rental income, your net, your rent gross rental income, a subject to a 30% folding Tax from the Tax because by default. So your first step is going to be, let’s get you an item. Let’s get you a w eight ECI as the name of the farm.
Chris (15m 23s):
And let’s provide, provide that to your property management company. So you are making from a tech. I promise I won’t get too technical, but you are making it effectively connected income election. And he left it out of the 30% withholding.
Jesse (15m 35s):
Okay. And before you go there and I don’t mean to interrupt, but just for those that don’t know, ITIN is the identification number, the tax number, right?
Chris (15m 42s):
Yeah. That is the social security number or equivalent for a foreign nationals. So you have to get that and it’s true. You would think that our government hands out, it was like candy because they want to identify people, but they don’t. Yeah. So you have to do, we do so our firm’s that was called the CAA certifying acceptance agent. And we kind of act as an intermediary for the IRS where we have to verify someone’s identity. We have to get us a letter from of the property manager. This is just some red tape we have to go through, but we can get the job. So you get the identification number. You can also apply for an ITIN when you file your first tax return. And, and so basically you have a buyer, a house let’s say you are going to get me, started to the 30%. Cross a folding, let’s say like that, of that.
Chris (16m 24s):
Then you will also enjoy the depreciation deduction on the property. You get two. So you continued on all of your cash expenses. You did it to deduct your mortgage interest to you if we have it. And you also get to deduct the cost to the property in general, over a 27 year period. So point as your cashflow is a lot better than your tax file your tax in the United States. If it’s over 10%, Oh, I’m shocked here
Jesse (16m 52s):
On the So So in the event that Okay. So we have lets just say we have a, you know, a fantastically, a profiting investment so that your depreciation is not covering all your tax liability for you to be eventually the eventual amount that you do have to pay taxes on. What, what is that? What are the implications on a state and federal level? And then when are you actually paying that? Or are you paying that and the States and then you are doing a credit or in your home country or is it, how would, how does that work with our example here?
Chris (17m 23s):
Sure. In our example, yes, you would pay your federal tax. So option one, you, you, you are okay with them with holding 30% of your gross rent and you just take that as a credit on your return. That’s a really bad option. Option two, you just pay at the end of the year with your tax return in general, the The tech, the 10 48 hours is that it’s a form of you in a file or do you in general, June 15th, not April 15th where like our domestic and then, or you can, if, if, if it depends on how much you owe you could pay quarterly taxes, but it’s a very rare, you’re typically going to get a credit on your home country for the tax is paid every state’s different.
Chris (18m 3s):
You were seeing that a lot of the state’s that are thriving right now with foreign investment have had no income tax. So I’m going to state of Tennessee, state of Florida. Does it state of Texas does that? So Nevada does that. So state by state that could be a state tax or state tax withholding. So yeah, that’s kind of the, that’s the best the fact pattern.
Jesse (18m 27s):
Okay. So if, if we complicate that fat pack, a fact pattern a little bit. And so for listeners to the om, I think the LLC and the state’s, you know, the, the benefits of that, of that structure is that you are, it’s a flow-through and that you are going to be taxed at your marginal rate. And the only Canadian equivalent that I’m aware of is a Canadian LP is a Canadian limited partnership. We don’t recognize LLC is I believe the CRA treats them as corporations. And you talk a bit about it, the, about the issues of, if this individual in our example puts the, the, the, the purchase, the property in and LLC w you know, why does he get bad marks?
Chris (19m 4s):
Yeah, exactly. So you, you hit the nail on the head because of the S the CRA can consider that a corporate entity. So you’re getting Tax personally in the us, or you’re not getting the credit and Canada for the Tax you paid, and they were turning around and playing whatever the corporate tax is in Canada. So that’s sounds like a lot of, one or two punches there. It does. And, and to complicate it, let’s start with the 10 40 NR, which is the, or your individual tax turn than a nine or a resident, a foreign national, or let’s say you, you said, I’m gonna buy this with my spouse went, now you have two, 10 48 hours to do, you know, so Or, Oh, I’m going to have an LLC with two partners.
Chris (19m 45s):
Well, whenever we have a partnership here, it could be a limited partnership, could be an LLC. If there’s prophet and a partnership, the partnership might have someone holding for those members, but let’s keep it easy. That’s why sometimes it’s better. If we have someone that, that forms an LLC here, and they realized that, Oh, I know that’s not good. We see you, you have the first step, a 75 days have any year to elapse to be text as a corporation. And the U S which is kind of nice.
Jesse (20m 18s):
What did you see us? Would that be a S an S Corp or a C Corp?
Chris (20m 22s):
S a C Corp. Yeah. So it would be a U S C court and, and that fact pattern I’m. Now, you said you were subject to corporate taxation. If you had a Tax it’s 21% right now, but again, most of these it’s where we see tax planning, because if your cashflow going really well, we might do a cost segregation study with what that means is that we’re taking a, we’re accelerating the depreciation or the cost recovery deduction on the property. Yeah. And, and then the other nice part about that is that you are, you are also avoiding you as a state tax because our, our, our, our state tax exemption for a non-resident is only 60,000 man hours.
Chris (21m 6s):
That’s very low. Now, again, there are there, our treaty, there’s a treaty benefits. You could say, you can apply in a treaty state’s, but it’s just, no, this is how we have to look at if it’s a fits, have property that you say it all starts at the beginning, right. It was the client. They say, I’m gonna buy this property. I wanted to, I want to rent it out. When I wanted to go to Florida on a golf, I want my kid’s to own it. And, you know, entities, probably not your best option, as far as like an LLC or a corporate entity. You’re not going to get what’s called a So now to go in a million directions, go to a step-up and cost basis when you pass away or potentially a living on some type of a trust or something like that, because you also don’t wanna get tangled up in, in probate court.
Chris (21m 50s):
It means you pass away and, and you own a property personally, two. So, so yeah, it really, it depends on what your objective is, you know, and we have, we have a lot of different rules, right. And even, but there is a lot of opportunity to, so if you,
Jesse (22m 7s):
If you move through that, lets lets talk about the, the C corporation. Okay. So say I, I buy a property, it’s a, a million dollar property, a multi-family property in the state’s. And I put in a us corporation, a, the U S corporation, a in the event that is taxed or, or if there is a income subject to tax now on tax at the U S corporate rate, which, which now if you can remind listeners and myself, what’s the US corporate rate now.
Chris (22m 35s):
Yep. Well, under the TCGA a tax cuts and jobs act in fact of 2018, it’s 21% flat rate. Okay. 21, which was a very low, lower than them.
Jesse (22m 45s):
And if you’ve ever had it in the past, if correct me, if I’m wrong,
Chris (22m 48s):
Correct. You know, there was a tier structure where the first 50,000 was taxed at 15% that did that change. So that was fair with you. Let me grab a sip of water here. Sorry. No problem. Now I don’t know if you guys realized we have an election coming up, so
Jesse (23m 4s):
Not a tax election,
Chris (23m 7s):
Right? Exactly. You have a real action. So right now that’s a big issue. We’re Joe Biden’s proposals to take that corporate tax rate from 21, up to 28% flat rate. So 30 or 33% increase. So, and, and so th that’s something to consider and a, when you’re doing the structuring, but lets just pretend we’re were playing. We are, we generally really play with what we know right now. There will be a corporate tax rate of 21%. Now the issue becomes if its a million dollar property I’m we have to look at how many owners there are. And let’s say you want to take money out of that, that core. Well, if the money is taken out to the core to the individuals and then you got to Dividend, which could be in each owner would have to pay a corporate, you know, there, the dividend, a tax on that, So probably a million dollars structure we’re going to go out.
Chris (24m 1s):
And again, we are going to make sure we get attorneys involved, but only specialize in this were probably going to do what’s called a two tier structure, have a Canadian cor on a hell of a wholly owned us Corps. Okay. And then the K the us court is going to kick distributions or Providence <inaudible> to the Canadian corporation. So that what we’re trying to do is we are trying to shelter the individual owners of that at the top of the, of the, of the property, which is owned by the Canadian Corp from exposure to the tax obligations here. So if it’s, you know, if it’s a, if it’s a, this is one owner, maybe if we might change it. But a lot of times what we see is that you have Hey 10 guys get together a girls’ we like to put a a hundred grand and we don’t want a trigger, a state tax and income tax on the individual level.
Chris (24m 48s):
And everybody in that case is a two tier structure might make sense.
Jesse (24m 50s):
Yeah. So Chris, if, if, if, if, just tell me if I have this right, because we employ a holding company and Real code structure where a real code is a company that owns the assets. We have a tax free Dividend that goes up to the holding company because they own the real co company and its basically to get income out of the real code case in the event that somebody sued in this structure, the Canadian or a foreign corporation owns the U S corporation, is that you can kick that money up tax-free on, is, is that on a tax free basis? And then if that, if the Canadian court distributes to individuals, then you are taxed. Is that right?
Chris (25m 27s):
Correct. Right. That’s the idea that is that that’s the idea, you know, and, and obviously if there’s rules and regulations, you know, we have to look at the situation, but that’s what we’re trying to do so that we’re not getting double taxed and were not, you know, because if you have a Canadian Corp owned the property directly here in the us, you get subject to what’s called branch profits tax and there are some, there’s some other, you know, really it comes down to how many owners do we have. We want to deal with the compliance costs, like Yeah filing returns. And I tends it is, we don’t wanna, we don’t wanna entity ourselves to death. So, but it is similar to the structure you’re talking about.
Jesse (26m 6s):
Okay, that’s good. That’s great. And you know, maybe another thing you could demystify for us or, you know, give us some clarity on is when we hear constantly, I’m pretty sure this is the case for other, a individuals that invest in the US of different States is going to Delaware. You know, forming a corporation here are forming a corporation there when you have just somebody that is looking like you mentioned Florida, that’s fine. An income producing property in Florida. Is there, do you, do you create the corporation Instructure in the state that has the property or are there other state’s that you specifically go there because of their advantages?
Chris (26m 42s):
Right. Well good. And I’m not an attorney, but that, I’m not that I’m trying to Dodge your question, but I can’t, I don’t have a camp practice law, so I don’t want to end up a Solon coming after me for some reason, but in general, right. We know that Wyoming, Nevada and Delaware in a very popular places to form entities. And the reason is, is that in general that they have a, there’s some, there’s a more unanimity there. And also if, if something happens or they have more or less
Jesse (27m 12s):
Case law, you have the case law and, and the,
Chris (27m 16s):
If something happens, they know that the case is going to have to go to that state and the case law of supports that state its more pro owner, or if you will, I guess if it comes down to the structure, I mean, if so among buying a, a a, I don’t know what $250,000 condo, a nice condo in Fort Meyer used to be really nice and four Meyer now it’s okay. But you know, let’s say you can do that. Am I gonna go through, make a Delaware, you know, LLC and then have to register that in Florida. I don’t know that its going to be worth it. You know what I mean? But if you do it in an apartment complex, it might be worth it for the asset protection. So it, so those state’s in general have a better asset protection rules to be owner.
Jesse (28m 0s):
So one thing
Chris (28m 1s):
That he is bringing in another resource.
Jesse (28m 4s):
Okay. Yeah, that makes sense. And you know, one of the, you know, I’m gonna, I’m gonna complicate things just a little bit further and now I’m gonna bring them back to some more general questions, but one of the things that I’ve heard and you could tell me if this is a, if this is accurate or if this is just nonsense. But one of the things I heard in terms of, you know, individuals that are saying that we used that example again about $1 million apartment building I have heard when people create limited partnerships. And now this is an entity that the Canadian government, the CRA recognizes. I’ve heard that if you invest using an LLC as the general partner and then the individual’s and investors as the U S LLP as the U S limited partner, that income from there, I can go through the LLC and it’s going to be taxed as a corporation for the States, a sorry for the K from the Canadian point of view.
Jesse (28m 55s):
However, the limited partnership agreement makes the GP a nominal owner. So a 1% or 0.0, 1% likely, you know, we see with a lot of these structures and then 99% two the LP. Whereas my understanding is that now the Canadians, a part of the You SLP have limited liability protection, but they are in a flow through situation by that. Oh, can you hear me? Okay?
Chris (29m 24s):
I love it. Yeah. I lost you for a second, but I think that’s what I said that yeah,
Jesse (29m 28s):
No problem. So my, so my understanding is that this is, this structure would achieve that limited liability from the Canadians and then being able to pass through to, for them to be taxed. That individual’s is, is that a myth or is it does make some sense?
Chris (29m 42s):
No, no. That’s a popular structure because yeah. You have a GP, it’s a, it’s a GP LP structure so that the limited partners Yeah yeah. And are, are, are not the So in the us. So when you have a partnership, you have limited partners, you have general partners in general, general partners bear the liability. So a lot of times what happens when you cut out a little bit, but I think I know what you’re talking about, where the general partner is going to own 1%, half a percent. It’s probably going to be a corporate entity. And then the other 99%, it could be individual or individuals, but there are there, they have a limited partnership interests. So their, their, their asset protection is still that way on the Canadian side. They’re not the LLC, there are a limited partnership in, in what you can do.
Chris (30m 27s):
The nice part about limited partnerships. You know, I’ll say this here in the States is that you can, you can have a limited partnership that says I own 50% of the property, but I get 25% of the profit I get on the 5% of the loss. So that it’s almost like they got some Plato, you know, or corporation, you can have different levels of stock shares, but it, it just makes, it gives you a lot of them so that if you really want it to you, you can probably just swipe the profits out, move it over to, to a corporate entity that might be, you know, okay. At a lower rate or depending on how things go. So yeah.
Jesse (31m 5s):
So from the tax point of view, when a US limited partnership, you, you know, when I say that US limited partnership, see’s a taxable income have a hundred thousand dollars for instance, is that immediately flows through to the earth or the flows through to the members of that limited partnership. And then that’s Tax them on their normal return’s. And if so, if those or Canadians do, or do they file in the States and then file for elections in their, their country of origin?
Chris (31m 36s):
Yes. So it’s a limited partnership is what we call it, transparent entity here from a federal level so that there are some States like in the state of Tennessee, a limited partnership actually is not taxed. We have a franchise and excise tax on LLC, but from the federal level, the limited partner is a ship itself is not tab. It will issue a K one with the name of the form to each partner based on his hurt or the entities ownership percentage. And what is in the partnership agreement. If it’s an LLC, it’s an operating room, the partnership agreement dictates, how do we distribute those profits? And it can be in that could change year to year.
Chris (32m 16s):
It could change. So at that point, though, if someone is a nun, a foreign national non US resident for tax purposes is a partner in a limited partnership to be, there is a potentially with holding a requirement by the limited partnership to me to send it in some type of federal tax, that tax that is, is taken as a credit when you file your return. So lets say you want a 5% have a limited partnership and you share the U S it comes to $110,000. You would have to file at 10 40 NR and you would report, I have $10,000 worth of income. Oh. But the partnership is required to mail in a thousand dollars a Tax okay.
Chris (32m 57s):
I get a credit for that. So where are we? What we see the trouble is when partnerships. So when we say partnership, partnership is a taxable entity here in the States. Partnership could be a, an LLP in LP and LLC, that’s just how your taxes, but a partnership that is supposed to withhold Tax that doesn’t, that’s when your risk is. And I think that with our, or just in the U S how are we are where our compliance environment, we’re finding that the IRS is, do they want to come after, you know, Jesse over some travel expenses or do they want to come over after Jesse LP because you didn’t withhold tax for 10 people.
Chris (33m 38s):
They’re going to come after that to a T. And that’s why the four, the first thing that we’ve said is that, that the first day of withholding yup. The property manager’s know now, but if they don’t, they do, they need to go over the last 10 years of doing these education. And I was like, Oh man, I should be withholding 30% tax. So if they want to cover themselves, because if they don’t have the ITIN and was from the owner, guess what happens? It’s 30% penalty plus penalties. So what we’re finding is, in my opinion, this is my opinion. I think the IRS is going to really focus on increasing their revenue by penalties and late fees. Not by, Tax interesting, right? ’cause the LP doesn’t own the tax, but if the L P was supposed to withhold, you know, and, and the other thing is, no, let’s talk about our Australian friends because Australians are gonna be more likely to farm a single member LLC here a few years ago.
Chris (34m 33s):
And there was a lot of change where a single, a single member LLC owned by a foreign national in the United States has to file a, a, a, a 54 70 to form. I know we’re going to tell you in a way to attach it to a 10 40 or a dollar 1120, which is our corporate tax return as far US listeners. It’s the, it’s the inverse of an F bar report. No tax is due on this, but the penalty is $10,000. If you don’t do it, if you don’t find it. So yes, we’ve had calls. We’ve had it. We had one person coming to us that it wasn’t a client. They ended up getting to $20,000 penalty and we ended up getting it abated. Thank goodness. But it, but still it’s M that’s where that the structuring, I, like I said, I really focused on compliance the tax preparation side.
Chris (35m 23s):
Again, there’s not much meat on a bone. Our tax rates are low. So what do they want in, you know, for someone to fight you over or some travel costs? I mean, that’s not more than,
Jesse (35m 32s):
Okay. So you said you mentioned something that has come up a few times, and that was the K one. And you know, that is, we have an equivalent, a partnership return that we file, you know, and I’m sure it, most countries file. What, what I’m curious about is that it’s a good segue into some people want to invest in the U S as, as complete passive investors in the form of being a limited partner, four, you know, you see all of these syndication deals and the States, you know, and sometimes it’s 50,000, a minimum 75. He typically you’ll have to be an accredited investor when you do invest in one of these. So lets use a grant Cardone, everybody knows Cardo and Cardone capital. And to invest in this syndication as a limited partner, you are going to be issued a K one by, by that company or by that partnership as a foreigner, when you get a K one, walk us through what you need to do, I’m assuming it starts with having an identification number.
Jesse (36m 26s):
And maybe you could walk us through the, the next steps with that.
Chris (36m 30s):
Yeah, absolutely. So yeah, the first step is lets assume a right you’re in individual, you have a limited, you’re a limited partner, your name, where do I ask the protection? Obviously the partnership itself is going to have some type of compliance. Some hopefully they don’t like that. That’s the fight, right? So they’re going to say, Hey, we need it. You know, we need it. We need your ITIN number. And, and then they’ll ask you for a w eight series for sometimes it’s the w a E C and sometimes it’s w a D E N. There is a few different forums is that gets the, I’m now the partnership, but they are at least going to ask you your item number. Okay. If, if you don’t have a, night’s a number of the fact that they’re investing in a syndication, which will allow you to get the night’s and number.
Chris (37m 14s):
Yeah. So the, typically that partnership’s going to issue you a K one S in general, the first year or two, you’re going to have a massive losses. ’cause the partnership’s most likely going to do a cost segregation study. And you’re K one, even though its a positive cashflow it’s in those back then we are seeing a lot of the mobile home parks are coming in really nicely on the, on the cost side study. So you’re going to get at this cable with a big minus sign. At that point, you don’t know any Tax you start to file your return. You tape that Q1 you file a form 10 40 and our stance for a non-resident in your report. I I have a loss of, you know, if you put a a hundred and you might have a loss of like 50, 60, 70,000 a year or one.
Chris (37m 57s):
Wow. That loss. Yeah. It’s it’s that last thing will carry forward and offset future income, future revenue on that.
Jesse (38m 6s):
K one and to just put it, put a pin in that there is that offsetting future income, does that stay in the boundaries of the us? Or can you use that for Canadian earned income?
Chris (38m 17s):
It well, if you’re US, if you are a foreign national, It only offset because if you’re a foreign national in the us was not going to tax you on your Canadian revenue, we only have to pay tax side of what we call US site of service. Now, if you come here too much, which now that are in COVID is not a big issue. What have you come here too much? That’s my, where I said, if you could be a U S tax resident right now, but not a us tax. So is there for a state tax purposes, there was something called a, I mean, assuming you don’t have a green card, but they’re, there’s a whole look back period on three years. How much time do you spend here or did you establish US tax residency? And unfortunately if you do your tax, so your text on your worldwide income, if you’re a US non-resident protects verbs, this is the only text on your us source income.
Chris (39m 2s):
So in that fact pattern, you did the deduction here. It would carry forward and offset future K one earnings or capital gains. I don’t know how it’s handled in Canada. So I can’t speak to that. What they do with the, do your US loss. But I would say here, so you would get the K one loss if you have a profit, but let’s say after, you know, they took a lot of depreciation, deductions of cash flows are Good They then they have a K woman with a profit on the limited partnership. If your, if your a foreign national, they are probably going to have to withhold tax on it. That’s okay though, you gave one is going to say, okay, I have four and I have a US tax paid, or you can get that back where you file your Tax 10 48 hour, because you might still have those deductions carried forward.
Jesse (39m 52s):
And you can probably just use the, when you do you say there is a Capital event and this indication either a refinance or a sale of the property you’ve invested in, you can do it. If I understand that correctly, you can use those, those accumulated losses to offset that eventual game.
Chris (40m 9s):
Right. Awesome questions. So yeah, I’m a Capital restructure. So that restructuring. So a lot of times, as you know, people are putting money in a buy undervalued property under producing, they did a going, you getting your cash out without selling the assets is not taxable. It’s just a return of capital M if you sell the property then yes. And the passive activity losses that you have that sort of, which would be the loss from the K one. Why is that passive? Because you are not actively running the syndication, those coming to play to offset that game. At that point, you could So and you can also running, we have a lot of weird rules as far as a basis issues. For instance, you have to have what’s called basis and in a, in an entity to take the losses or they carry forward, you can have a basis by assuming some debt or being responsible for that.
Chris (40m 59s):
I know it’s getting really technical, but the bottom line is lost is going to carry forward and offset gains at some point on your US Citus.
Jesse (41m 7s):
Yeah. Yeah. A very similar, very similar to the, the Canadian structure. And I think most tax structures in general, I don’t know if this is the same for the state’s, but just it just as an aside, I know the one nice thing about owning rental properties in, in Canada personally, that the actual loss is that you do have, you can offset T forward or if for you, I think it’s w a w for or whatever <inaudible>. So we can actually, you know, if you make a hundred thousand dollars and you have $10,000 of rental property, a rental property loss is you can offset your personal income. I don’t know if that’s the same for the States and less, you are a real estate professional.
Jesse (41m 47s):
And I know there’s some applicability or rules around that.
Chris (41m 51s):
Hmm. Yeah. And I, you know what, it’s funny because we were looking for some way to explain the real estate professional to a lot of rules. And we just had about two months ago and lets us create our own flow charts so I can email you to be great. I got a six minute walkthrough video on how can you write off your passive activity losses by default rental activity as a passive activity, but you, but you nailed it. We have an income thresholds for being able to take those losses, unless you’re a real estate professional or does it get real estate professional designation witch in general. So you have to have it in the States 750 hours into that activity. And it has to make a lot more than 50% of your professional work for the year.
Chris (42m 32s):
So if you are, if you are, yeah,
Jesse (42m 35s):
What are you going to say? It’s a nice bonus. I don’t think a lot of Canadians realize that they have that we don’t, we don’t have to reach all those thresholds.
Chris (42m 43s):
Yeah. So what’s interesting. And Canada, I’m not sure what the depreciation rules are, but you know, they might, if they follow our depreciation rules, I doubt they have bonus depreciation. Like we do it, you know, so, but yeah, that’s a nice feature. So that, that’s a good thing and Awesome
Jesse (43m 0s):
Right. Okay. Well, Chris, listen, I could, but probably have this conversation for another hour. This is a, this is fantastic, but we are kind of coming towards the end of the hour. So, you know, what we’d like to do is just ask some questions. We ask most people that come on the show and you know, it just kind of a, a, a, a fast round here for your career, whether it’s in taxes and accounting real estate, what was one book that, ah, you know, that you really love to recommend?
Chris (43m 31s):
I love rich dad, poor dad. Yep.
Jesse (43m 34s):
You can’t say, Oh, you know, I be lying. If I said, if we didn’t hear him, we haven’t heard that one before. And it it’s definitely a classic. If it comes out, you know, it comes up all the time. What is something that you wish you knew at the beginning of your career that, you know, now
Chris (43m 50s):
The that property in Nashville? It would be so expensive. No, I don’t. Okay. So what do I wish I knew? I wish I didn’t quite so much money in retirement accounts and I wish I would have started investing real estate a long time ago and studied M different cities. And, you know, I had an awesome, awesome upbringing. Awesome childhood. I just didn’t get out of Michigan mush. You know, I didn’t know what it was. So I wish I would have studied markets more kind of more money liquid. I wish I would of never bought my first primary residence and saved more money in, in bond investments earlier.
Jesse (44m 28s):
It’s great. That that’s a good one. We haven’t heard as much, but you know, the older you get and you start really researching retirement savings. And especially if you’re a real estate investor, you’re like, yeah, I will look for investing in real estate and have that money worked for me. You know, if you don’t have to give names, but you know, some early mentors, whether it’s individuals, you know, reading books or, you know, somebody that you’d necessarily didn’t necessarily know or people within your career, you know, who we are, the mentors that kind of created the, the guy that we see today in front of us.
Chris (45m 0s):
Yeah. Well, I would say my best mentor is my dad and he’s and you know, my father-in-law also I’ve been married. Well, gosh, I’m trying to count them that good with numbers. So it’s going to be 13 years had Awesome role models. As far as my father-in-law is a M it’s been an entrepreneur for a lot of 40 years. It goes from being a home builder. And, you know, in my dad we’re were praised from a retired from Chrysler and in Detroit, they just know outside of, outside of business, my bed worked extremely hard to give me the opportunities. I was always entrepreneurial. I mean, I was, it was wheeling and dealing baseball cars, and no one will play monopoly with me. I was, I was always trying to you, I had a paper out, but they, you know, have a lot of good work ethic.
Chris (45m 45s):
And he said he was just always a good listener, just good advice. And my father-in-law has an entrepreneurial spirit. So unfortunately, like I ended up starting with a practice when I was 27. So unfortunately I didn’t really have too many mentors and I had some things I wanted to do that, that I learned, you know, that I didn’t want to do, but I would say, yeah, my family,
Jesse (46m 7s):
I know it’s a little bit of the school of hard knocks in the, in the career as well. That’s great. And then my final and favorite softball question, first car, make and model.
Chris (46m 17s):
Oh, geez. I would say I had a two, so it was my parent’s hand me down. Right. And this guess all keep going. Yeah. It was a kid. It was a Caravelle, a Dodge care about probably year. Well, I started driving a 91 and when they were going to hand me down about a minute, about 1990, 1989, 1988. And it was maroon. It was kind of ugly, but it had a, a fake convertible top. It looked like it was a convertible, but it wasn’t. And that was kind of good because in Detroit, you wouldn’t use your convertible nine months out of the year anyway. So if we’re out cruising and, and try to see what’s up in a town and looked like we had a converter,
Jesse (47m 2s):
That’s amazing. You know, the funny thing for people that don’t know cars, if you saw the The, I think it was a Plymouth to right. The, if you saw this car, you would know exactly what Chris was talking about. And that is fantastic. You have the, you had the old school grille on that thing too.
Chris (47m 16s):
Ah, yeah, it might’ve been Plymouth care about it. You know what it was, there you go. And it was Plymouth, not Dodge, you know, you guys, you would have been too fancy for us. So that’s amazing. I’m looking at a picture of it on my other screen right now. And I’m Oh, do you know the 1988 Plymouth care of it,
Jesse (47m 32s):
American icon. And that is, that is a, that is fantastic. I Chris, where can people reach out to you? I wish we had more time and we will have to have you back on maybe, you know, later in the year or early next year. But if people want to get in touch with you, if they have any questions as a result of this, Podcast, where’s the best place,
Chris (47m 51s):
Right? I’m happy to help people out. I would go to the real estate. CPA that guru real estate cpa.guru. If you’ll just put your name and email And and we’ll get it, we’ll get an inquiry. I’ll reach out if it’s something easy and quick, you know, of course, every quick question has a long answer and vice versa. What about something you just need a little help with? We would just reach out. And if it’s someone that’s looking to partner with a CPA firm, we would actually have an initial consultation. But again, I don’t wanna see if someone has a quick question. There’s no reason to set up a formal meeting and looking at tax returns. I’m just happy to help people out. And I’m very blessed to, to have the opportunity and, and I’ve learned so much from other people.
Chris (48m 33s):
So kind of like, ah, you know, what, what does knowledge if you don’t have it?
Jesse (48m 37s):
Oh, for sure. My guest today has been crispy. Kira Chris thanks for coming on the show. Oh my pleasure. Thank you so much. I really enjoyed it. Thank you for listening to the work in Capital podcast. My goal is to help individuals Break into real estate investing as well as educate experience investors. If you enjoy the show, please share with a friend subscribe and give us a rating on iTunes. It really helps us. If you have any questions or want to learn more or less of me to cover a specific topic on the show, please reach out to me via email@example.com. My name is Jesse Fragale and we’ll see you back here for the next episode or the Working Capital The Real Estate Podcast.