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As a California property owner, you have the right to appeal the amount of your property taxes. You can use an attorney to represent you in your appeal, or you can do it yourself. Property taxes are assessed (and appealed) on a county-wide basis in California, so for those of us in Riverside, Banning/Beaumont and the Coachella Valley (Palm Springs, Rancho Mirage, Palm Desert, Indian Wells, etc.), our appeals are handled in Riverside County.

Am I really Challenging The Amount of My Taxes?

Actually no, what you are really challenging is the Riverside County Assessor’s enrolled value of your property.

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We’ve written before about Canadians being subject to the US estate tax. We know that a Canadian (or any non-US domiciled (also not a US citizen) individual) can be subject to the US estate tax on the value of some of their US property when they die. What property are we talking about? Mainly the value of their US house(s)/ real estate, and furnishings in the house(s), and (and this is important)- the value of their US securities (stock of US companies). US securities count no matter where the Canadian holds the stocks, but there is an exception for the US securities held by a Canadian mutual fund (but note, there is no exception for securities held by the RRSP of a Canadian…the value of US securities held in those count).

How Much May a Canadian Exempt From the US Estate Tax?

Recall that this year US citizens/or residents can exempt $5M from their US estate tax computation (that’s a good deal for Americans, but on other hand they are subject to the US estate tax on the value of their assets held anywhere in the world, not just their US assets). But next year, as presently scheduled, US citizens may only exempt the first $1M from the estate tax (yikes).

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This is the third (and last) part in this series. We see a lot of Canadians here in the Palm Springs/ Palm Desert area/ Coachella Valley area who are interested in not just vacationing here, but in purchasing property which they will then rent out. This series has been about the best way to own California property which will be rented out, with the goal of minimizing any damage from a tenant who likes to sue landlords. While this series has been directed towards Canadians purchasing local property, everything we’ve written in this series (with the exception of the discussion about LLCs and why they don’t currently work for Canadians) applies to people from any country, and for that matter much of it applies to Americans wanting to purchase and rent out California property as well.

We’ve concluded that the limited partnership is likely the best structure (for now) for the Canadian looking to purchase and then rent out Palm Springs/ Palm Desert area/ Coachella Valley property. Let’s look at a few more questions and answers on this topic.

Why Don’t I Just Use a Corporation to Buy the Property, But Instead of My Corporation Selling the Property with the High Tax Rate, I’ll Sell My Corporation’ Stock (with the Property in it) at the Low Tax Rate?

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In my last post, I summarized that for Canadians looking to purchase California real estate which they could then rent out, but who were worried about potential lawsuits from their tenants (as they should be), utilizing the limited partnership form was probably the best method of ownership currently available. Let’s take a closer look at to why…

Why Can’t I Just Purchase My New California Rental Property as an Individual, as Joint Tenants or Tenants in Common?

Because owning property in an individual capacity provides you no liability protection. If your tenant gets hurt on your property, he or she can sue you personally for all you have in a California court. And keep in mind, it is quite possible that a Canadian court would enforce the judgment of a California court.

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IR-2012-65 allows Dual Citizens who Don’t Owe Tax in the US a Pain-Free Way to Become Compliant

First of all, which dual citizens don’t owe tax in the US? As a general matter, a dual citizen who have been living in a foreign country and been paying that country’s tax (as appropriate) probably does not owe much tax in the US (if any). The US taxes its citizen’s income no matter where they earn it anywhere in the world. But the US also works in cooperation with almost every country in the world (except for countries such as Cuba, Iran and Yemen…i.e., countries we have no relations with). If you are an American citizen living in France (you might also be a French citizen), and you have been paying your appropriate French tax for the money you earn in France, odds are you will not owe tax in the US. Why is this so? Most foreign countries have higher tax rates than the US. So as long as the income is of a type which we recognize (such as wages for services, or gains for stock sales, or rental income, or dividends, etc), the US will credit income earned in France by the dual French/US citizen. Thus, after the credit, the US citizen probably owes $0 US tax or very little US tax, on the amounts he earns in France. And the same goes for that US citizens with most every other country.

Now let’s not confuse the issue of whether the dual citizen owes any US tax with the obligation of the dual citizen to: (a) file US tax returns; and (b) file FBARs annually if they have bank accounts outside the US with over $10,000 at any point in the calendar year. Those obligations generally exist whether the person owes US tax or not. But for those people the new guidance is terrific. Those individuals must complet their past-due tax returns (at least 3 years) and delinquent FBARs (at least 6 years), and they’ll probably have no penalty to get compliant provided you don’t owe significant US Tax. A great deal.

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Many Canadian snowbirds who purchase Palm Springs area property wish to rent out the property during the time when they can’t use it personally (or maybe rent it out all the time). I think it’s a great idea, primarily because if the snowbird plays his or her cards right, they can receive rental income and possibly owe $0 tax on the income in the United States- a great deal. But if you’re going to let strangers use your property as business guests, in these days of excess lawsuits, you have to protect yourself. Insurance is a must, but insurance will only protect you to a certain point. It is possible a court could award a settlement of a far higher amount than the value of your US house or your insurance. Next, the injured renter wants every penny you have to compensate for the injury. Finally, I am asked from time to time whether a judgment from a California court could ever be enforceable in Canada? The answer is it is possible for a judgment from a California court to be enforceable in Canada. So Canadians, like Americans, need to be careful about how they conduct their US businesses, just like they need to careful about how they conduct their Canadian businesses.

So Let’s Review Our Various Ownership Forms From a Liability Protection Perspective

Ownership as an Individual, as Joint Tenants or Tenants in Common– If you are going to rent out your property to strangers regularly, none of these basic forms of homeownership is likely a wise idea. In each case, the owner can be sued in his or her personal capacity (it’s either one or multiple individuals who own the property), and that means (in a worst case scenario) you could lose all your personal assets.

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So a few months ago on this blog we informed you that the IRS offered a new FBAR amnesty program (now the 3rd program it’s offered), but that it only had released the broad stokes of the program (see our entry from February 16, 2012, for our last discussion of this topic). Since then, the IRS has established new procedures for dual citizens who have foreign bank accounts but who have paying the appropriate tax on the amounts in the those accounts in the foreign country at issue. Taxpayers with this situation can resolve it rather easily without having to go through a formal amnesty program (see our post from July 5, 2012, discussing this new option). However, that program won’t be available for everyone, and for the rest there is now the 2012 Overseas Voluntary Disclosure Program (the “OVDP”). On June 26, 2012, the IRS issued a set of Frequently Asked Questions and Answers (this is new guidance to assist taxpayers under the 2012 OVDP).

Background

Again, recall US tax citizens or residents must file a “FBAR” (a “Report of Foreign Bank and Financial Accounts”) annually, provided the US citizen or tax resident has over $10,000 in financial account(s) which are not located in the United States. The term financial account includes any savings, demand, checking, deposit, or other account maintained with a financial institution in addition to certain annuity and life insurance contracts, commodities and precious metals and safe deposit accounts. The FBAR is filed on a US Treasury Form TD F 90-22.1, by June 30 of the year after the US citizen or resident had a non-US account.

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So we’re continuing our discussion of why, for the sole purpose of avoiding or minimizing the probate costs of the Canadian snowbird, a trust is likely the best way to own your Palm Springs area home. Remember, probate is the legal process your estate goes through when you die. For the Canadian snowbird who passes away from Vancouver with a vacation house in Indian Wells, there is probably already a probate which must occur back in British Columbia. If at all possible, why make it two? It’s expensive, it can be difficult due to the international component, and can be time consuming (maybe even takes over a year). And by the way, the same analysis holds true for somebody whose permanent residence is in Japan or Germany, or even for somebody whose permanent residence is in Michigan. So if you’re not living permanently in California, you probably would rather avoid a second costly probate (which would occur in California). We will call the second probate in California (the one we’d like to avoid if possible), the “ancillary probate”. Review our last post for an overview of the costs of the California probate process.

Let’s Revisit our Various Forms of Property Ownership, and Review Whether, Upon the Death of a Canadian Snowbird Owner, a California Ancillary Probate is Required.

Property Owned by Individual– If Larry from Vancouver owns, in his name alone, a house in Indian Wells, upon his death a California probate is required to determine who inherits Larry’s Indian Wells house (i.e., so while the rest of Larry’s estate is likely going through the primary probate in process back in BC, the estate has no choice but to also pay for the expensive costs of an ancillary probate in California). As a side note, the California court would likely admit Larry’s Canadian will to determine who to distribute the Indian Wells house to.

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On June 26, 2012, the IRS announced a new initiative to help US citizens living in another country (very likely dual citizens) catch up with their unfiled US tax returns and FBARs.

Background

In our law office in Palm Springs, we regularly see clients who may be Americans by birth, but who live in (and are also probably a citizen of) another country (usually Canada). While the dual American/Canadian may enjoy visiting Indian Wells three months a year, she really lives in Vancouver. But since she was born in Seattle, she has a social security number, she is a US citizen, and (whether she wants one or not) she has an obligation to file a US tax return every year (even though maybe she’s never filed one in her life). Plus, since she has bank accounts outside the US in Canada with more than $10,000 in them, she has an annual FBAR filing requirement as well.

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We’re going to start a new series on our Canadian blog, aimed specifically at those Canadians purchasing Coachella Valley real estate, and the best way to own their new Palm Springs areas home (i.e., how to take title). The first issue we’re going to discuss is how to best to take title to avoid (or minimize) the expensive cost of California probate. Keep in mind as we discuss the issue of probate, the analysis is the same whether we’re talking about somebody from Canada, or France, or Brazil, or even Washington or Oregon (i.e., people who own a home in California, but who live either in another state in the US or in another country outside the US).

Let’s First Identify the Common Methods of Real Property Ownership

Owning as an Individual- self explanatory.