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Owning U.S. Real Estate- Tax Structures

Don’t worry readers, I didn’t end up buying U.S. real estate, but admittedly I was very tempted and enchanted by the idea that I ended up doing a bit of research to see how one goes about buying U.S. Real Estate.  In the end I thought that it seemed a bit too complicated for me and I didn’t want to sink so much capital (of my net worth) into another piece of property.  And not to mention that the prices have gone up and the Canadian dollar is down.

I first became enthralled by the idea when an acquaintance of mine bought a house in Washington state for just under $80,000.  Yes, for about the same price as a luxury care you can own a house in Washington state with a bit of land.  He was renting it out and had no trouble finding any renters.

Well, turns out there are certain states that are more amenable to owning a rental property than others.  There are also regulations in terms of rental income that need to be adhered.

Now, I’m by no means an expert nor do I have first hand, so take this information with a grain of salt!

Tax Implications of U.S. Real Estate

  • Owning U.S. Real Estate- Tax Structures30% o your gross rental income is withheld unless a W-8EC1 is filed.
  • You have to report rental income on United States federal and state tax returns (and if you don’t, you’re going to get into big big trouble)
  • Depreciation of your property is mandatory
  • On the Canadian side, you have to fill out a T1135 form, Foreign Income Verification Statement (and if you’re late with it, it’s a $2500 fine)
  • As mentioned, there are certain states that have no state tax.  These states still have federal tax, but no state tax.  These include Washington, Florida, Texas (and many others).  For Arizona, there is about a 6% tax which i pretty low.

Tax Implications on the Sale of U.S. Property

  • You have to note the year of acquisition, any improvements, and date of sale (well, of course)
  • If you have a lower net worth- you might consider a personal ownership/ structure, you have to consider that you have no limited liability protection (for example, if a tenant trips and falls on one of your U.S. properties you will be sued big time and there is no protection), that the long term capital gain on the sale of the home is 20% if you have held the property for more than one year (the benefit is that this is low).  Another consideration is that there is estate tax exposure if you own it personally.
  • On the other hand, many people hold U.S. real estate property through a Canadian Corporation.  It is expensive to start up and set up however the benefit is that there is no United States Estate tax.  The other thing to consider is that the tax on capital gains is taxed at regular income.
  • Finally, the third option is the Limited Partnership.  In the Limited Partnership Structure, you will still have U.S. estate tax exposure.  There is a one time legal cost which means more paperwork.

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Pros and Cons of Stop Limit Orders

First, I should probably explain what stop limit orders are.  Stop limit orders is an order placed with the brokerage that combines a stop order and a limit order.  Once the price reaches that price that you set, the order will be executed.  Here is how to set up a stop limit order in your brokerage.

Pros and Cons of Stop Limit Orders

I’ve been burned on both sides when I used a stop limit order to protect my investment from a big drop.  When I mean burned on both sides, I didn’t set a stop limit order one time and faced a huge drop in my investment (nevertheless it bounced back) and another time (or a few times, really) I set up a stop limit order and sold my excellent dividend paying stock when it bounced back really well (and continued to climb for years to come).

The latter example happened when I was on an overseas trip in 2010 and had set my stop limit order for Telus shares.  It dropped and triggered my stop limit order while I was away and unbeknowst to me, it triggered a sale of my shares.  Since 2010 the shares have climbed and climbed and I had ended up buying back a few shares but only about 25% of what I owned beforehand.

Pros of Stop Limit Orders

Pros and Cons of Stop Limit OrdersFor me, the pros of stop limit orders are that I can sleep soundly (or try to sleep soundly) and travel soundly knowing that I have a protective mechanism in place in case the market were to crash or there were to be a large drop in the share price.  The ability to set it and forget it takes the emotion and planning out of investing (which is a key aspect to investing).  It gives a little bit of piece of mind, however, this piece of mind is not always 100% reliable (as you soon shall see below) and it does not always work in your portfolio’s favour. Continue Reading

June 2015 Dividend Income Update

Here we are in the 2nd quarter over, and have the year is through already! Time flies.  In my last update (March 2015) I had just over $5500 of annual dividend income.  Going through the changes to my dividend portfolio took a lot of concentration because of all the changes I made.

This quarter I have close to $5800 in annual dividend income.  I would like to see if I can get $6000 in annual dividend income by the end of the year, which would give me a clean $500 a month in dividend income.

I also managed to keep the dividend payout to 4.50% (which is very close to the 4.51% last update) which is quite interesting.

If I had a million dollars in my dividend/ investing machine portfolio with a 4.5% annual dividend return, I would have $45000 in relatively unscathed-by-taxes income which would be a dream! Retirement here I come, LOL.  I’ve got quite a ways to go for that, though!

Changes to the Dividend Portfolio

There were quite a few changes to the dividend portfolio, which included dividend increases, addition of dividend paying stocks, and rebalancing/ adding more shares.

The two that had notable dividend increases includes Sunlife (SLF.TO) which increased their dividend from $0.36 a share every quarter to $0.38 a share every quarter.  This represents over a 5% increase in the dividend.  I have 105 shares of Sunlife, and have owned them for a long time (since 2008 I believe).

The other stock that increased its dividend is Bank of Montreal (BMO.TO).  BMO increased its dividend from $0.78 a share every quarter to $0.80 a share every quarter.  This represents a 2.5% increase.  I have 100 shares in Bank of Montreal.

Another major change was the decrease in the CPD shares (triggered a stop loss) and buying of ZPR (also preferred shares) in addition to re-balancing the non-registered portfolio and buying more VUS, VEF, ZDV, and CLF.

I added SNC Lavalin (SNC.TO) a Canadian engineering company that builds all over the world that has recently been priced very low because of recent issues and allegations of corruption.  It pays a little over a 2% dividend and had a recent increase this year.  I bought 25 shares and then 25 more shares.  I also added National Bank of Canada (NA.TO) and bought 50 shares.  It pays about a 4% annual dividend.  I also re-bought Ensign Energy (ESI.TO), I just couldn’t stay away haha.  It triggered a stop loss and I bought it at a lower price.  The dividend for Ensign Energy is around 4.8%.

Finally I bought 50 more shares of REI.UN (RIOCAN REIT).  I remember walking near a Canadian Tire in Vancouver and seeing the RIOCAN sign and fancy garbage can.  At first I was annoyed that this particular Canadian Tire charges its customers parking (and heavily enforces the parking) on the rooftop whereas all the other Canadian Tires have complimentary parking.  Then I realized that it was benefiting me because I have shares in REI.UN.  Nonetheless I didn’t end up parking on the roof, haha.

If you want to make your own spreadsheet, check out my snazzy ‘step by step guide on how to make a dividend income spreadsheet‘. Continue Reading

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