US Detroit - turning the bend

For these properties in the US - Detroit and Atlanta etc. How are properties rented out, is it the same as here through a property manager/ agency etc?

 

Yes we use a licensed property manager.

 

Excellent article

 

Downside #3: Proactive Government
As much as the government is doing great things for property values, they’re also in the process of causing a significant problem. To wit, the city has declared that it will soon start enforcing its long-ignored rental registration laws, meaning thousands of landlords in the city is going to have to choose between bringing their ancient, abused homes (currently being rented to extremely iffy tenants) up to code or selling them. For most of these homes, the cost of renovating up to code isn’t worth it, which means the supply of genuinely bad homes to purchase is going to shoot up.

This may cause excess supply, and drive values down.


Downside #2: Costs Also Vary Wildly
It’s not that hard to find a house with a great rent-to-value ratio, but it’s important to realize that R2Vs are based on gross rental income—and costs in the Detroit area can easily be significant enough to turn your net rental income negative if you’re not careful. Getting an accurate estimate of your home’s future costs is one of the most difficult tasks associated with successfully navigating the Detroit housing market.


Can anybody explain how the income earned in the US is treated for Australian tax purposes?

 

I am not a CPA so this is not advice but my understanding is that if you have an LLC (limited liability company) that acts as a disregarded entity the income flows through to the owner of the LLC. The owner of the LLC pays tax in the US, declares that income on the Australian tax return and gets a full tax credit for the income tax paid in the US so effectively there is no double taxation between the 2 countries. Please verify all information with your tax professionals as I am not licensed to give tax advice. No liability is accepted!

 

@EricIP No, these are not required to make the purchase.

The bank account allows you do to business easier and makes accounting easier.

The LLC provides a level of credibility and protection.

The tax file number is required later when tax returns are filed. Depending on your eligibility, an ITIN or Social Security number will be issued to you which is essentially the US equivalent of a TFN.

 

Sure, but if I pay 25.7% in Michigan ( combined State and Fed corporate tax rates ) but my marginal tax rate in Australia is 37%, do I still pay the ATO and additional 11.3% residual tax? Surely the tax credit I get in Australia is only for the the US rate of 25.7%?

Here's an example of what I mean, and how the numbers are changed dramatically depending on the answer to the tax question.

If I buy a property in Detroit for 32K and the projected numbers look like this ( below) I am being led to believe I am going to earn $4230 USD as profit. It says "profit" after all This would represent a return of 13.22% on an investment of $32,000. Impressive by an measure. Gets me very interested.VERY

But where is the tax? It hasnt been disclosed/accounted for.

So now I go and pay the relevant state and fed taxes on $4320 at a rate of 25.7% ( Michigan) , resulting in a $1087.11 tax liability which hasnt been disclosed in the figures below... so this immediately has a huge impact on my true return. Suddenly my true return appears to be $3142.89 , which represents a return of 9.8% on 32K . Good numbers, but certainly not 13.22%

then comes the Australian tax treatment. Do I then also pay an additional 11.3% to the ATO, in order to bring total tax levels to 37% ( 25.7% paid in the US and 11.3% paid in AUS) If I do, this would result in a total tax liability of $1565.10 , meaning my real "profit" is $2664.90 not $4230. This represents a return of 8.33% against 32K. Again, good numbers, but not 13.22%. Makes me less interested.Those numbers are very skinny. A prolonged vacancy or some unforseen renovation/rehab work will blow that profit pretty darn quickly.... and these properties are @ 90-100 years old so that possibility is a very real one.







The broader point I'm making is that when I see US property sellers advertising yields of 10% or 15% or 20% , I dont ever see a line item for state tax, federal tax, Australian tax. Im not trying to give anyone a hard time, but I would have thought that if someone is going to earn a living offering this product on Property Chat they should know the answers to these questions and include them as line items. I find it literally IMPOSSIBLE to believe that anyone who has owned a property there ( let alone 10,20,30 or 50+ properties ) and has been required to lodge a tax return there and here, cant know how this works.... Back to front. Inside Out. Upside down and every which way, in between....

It would certainly help me understand what I actually get in my pocket if I invest.








US Corporate Income Tax More Now More Competitive - Tax Foundation

 

I look at my US tax returns since 2011.
Gross is clearly a different beast to net. My net income averages at 40% off gross in Atlanta, just to make it simple. This is how I work my numbers.
Detroit - 45%

Success in US market comes down to right product, right price and most important right property management. If you get this right, you probably have a very good chance of making money. Get this wrong, cash flow out the window, but you will most certainly achieve growth, why ? its not guess work? Its actually happening... Handy when you don't need a crystal ball

 

One thing to consider with the US is that actual money in your pocket VRS net taxable income on your tax returns will be quite different due to the tax advantages available in the US.

Depreciation for example is different to Australia, you can depreciate the entire building over the next 27.5 years irrespective of the age of the building so your actual NET TAXABLE income in the US is a lot less than what you bank due to the on paper returns. With the new trump tax legislation LLC disregarded entities may also be eligable for up to 20% discount off the NET taxable income.

As an Australian you have to pay tax on your income , whether it be earned locally or internationally, no getting away from that so depending on your personal tax situation you may or may not owe the ATO money.

I don't see why @GentleChief would or could with any accuracy disclose personal taxes payable against a particular property. It is ludicrous to expect him to calculate what your personal tax situation will be, it will depend on whether you set up an LLC as a corporation, or as a disregarded entity, whether its a single member or multiple member LLC, whether the member of the LLC is an individual, trust or superfund. (With discretionary trusts you can distribute the "profits" between family members thus reducing taxes payable in both countries) It will also depend on how many properties you own in the US, what tax bracket you fall into based on the TOTAL income earned for the financial year, what allowance you have for depreciation, what repairs you did, whether you had carried over losses from other rehabs/ acquisitions in the US and many many other factors.

I have personally not seen any estimates for payments to the ATO on Australian advertised property when calculating possible yield on a property. How could the seller know what your marginal tax rate will be and how much income you will earn for the financial year and what other deductions from others investments you can use to offset your income?

If you want to understand what you will personally pay in taxes I suggest you contact a licensed CPA in the US and Australia and go through your personal scenario of income and expenses in both countries and your corporate structure.

Just an FYI an LLC acting as a corporation (rather than a disregarded entity) will pay double taxation if they repatriate the funds to Australia this is because the ATO does not provide a tax credit for tax paid by the corporation. Not a structure I like for my personal situation this is why I have gone with the disregarded entity.

Corporations, disregarded entities and individuals also have different tax rates.

Your expectation that someone presenting a real estate deal should be able to calculate your personal taxes is ridiculous.

I repeat I am not a CPA and this is not tax advice. Anyone interested in buying US property should engage the services of licensed tax professionals.

 

I am buying this, but it wont be cash flow positive damn $2.8M, $24,000 taxes

226 Provencal Rd, Grosse Pointe Farms, MI 48236 - realtor.com®

 

It may be depending on what rent you could get.. At $20k pm it should be cashflowing. lol

I don't believe that you will get a ATO tax credit for any state tax paid only get a tax credit for the Federal tax paid.

 

I didnt mention@GentleChief. That's on you. This isn't specific to him. I've seen your projections as well and they also omit federal and Australian taxes. And others do the same. So lets not single any one person or business out. Its everyone who is doing it ( or not doing it, if we want to be accurate )

My view is that it is ludicrous to omit the taxation and then take offence when I point out its been omitted. Just take a look at @MTR. She has stated she sees 40-45% of her Gross numbers eaten away... I dunno about you, but I don't consider that to be something that should be dismissed as being too difficult to talk about ...its a substantial number.

Whether a person invests through one entity or another, if you or anyone else are selling them an asset with a projected cash flow of X and omitting to account for possible tax implications, the numbers are inaccurate. Simple as that.

Arguing that by employing complex ( and expensive- those costs are also omitted ) structures such as discretionary trusts you can effectively under the right circumstances minimise your liability to zero is all well and good. But it assumes an investor has the scale to make this economically viable. It would require multiple - perhaps dozens of properties to justify the expense. What do you say to someone purchasing just 1 property ?

Arguing that an investor may be holding a sizeable enough portfolio that some are loss making and offsetting the profits on others is also all well and good, but what do you say to someone purchasing just 1 property?

The problem with both your arguments is that you and others package and promote the properties on an individual basis. So there is no reason you or others shouldn't be able to produce a no frills cash flow analysis for a 15% ( SMSF) 32.5%, 37% and 45% marginal tax rate. That way, for anyone who is not buying large volumes and/or employing a more sophisticated and expensive legal and tax structure, they will have accurate numbers , or least accurate estimates. Now, if above and beyond that, someone is able to reduce their exposure through a sophisticated tax structure then all you have done is to have UNDERestimated the returns in that situation. But by omitting any liability whatsoever you will more often than not be OVERestimating the returns- especially for those with vanilla tax arrangements.

I see nothing ridiculous about that expectation. Its perfectly reasonable. What is ridiculous though is to imply that the tax stuff is too complicated or not important enough to warrant your attention or efforts. With all due respect- that's a cop out .

I produce a cash flow analysis for every marginal tax rate, for every property I sell. It means that I present a base line worst case cash flow scenario for each property. If a client happens to be able to take advantage of additional deductions and benefits that the property itself doesnt produce, that only improves their position. But if they are literally a vanilla investor with vanilla tax circumstances I have provided figures that are reliably accurate.

It will never be 100% accurate of course , because life happens. But what it does do is provide quite accurate enough guidance about what they'll see in their bank account when all is said and done that they can make informed decisions and what it certainly doesnt do is underdeliver. . There's no reason you and others can't do the same for US properties. Omitting the figures and then defending their omission just does you a disservice.

 

So you'll actually owe the ATO more, again? The equivalent of the state tax...so 4,5,6% etc- depending on the state involved. This would have the effect of reducing your actual net returns even further ?

Just demonstrates yet again how the numbers ain't really the numbers, where US property yields are concerned...

The numbers are still good. The just arent what people are promoting them to be.

 

What's perfectly reasonable is that a client seeks out professional tax advice from a licensed professional about their personal tax situation. I am not a CPA and it would be foolish of me to give any form of tax advice. I personally have clients from 11 different countries so does that mean I should work out the taxes for each of them and what they will owe their home country on a cashflow report as well? I can only speak for myself but when I prepare a cashflow report its just a guide to show the basic fixed yearly costs, insurance, property management fees, council rates, strata fees etc, my clients understand this. Vacancy and repairs will vary between properties and I suggest to clients to allow for this in their numbers. In terms of referencing @GentleChief I only did so as YOU posted his cashflow report.

At no point am I saying the tax stuff (advice is too complicated or not important enough to warrant your attention or efforts) In fact I do the responsible thing and suggest my clients speak to a person qualified to answer their tax questions and refer them to professionals that can assist them.

If you choose to play CPA with your clients that's your choice but I don't see that as my role.

I would rather not give out information that I know will be almost impossible for me to calculate with any level of accuracy. You are not dealing with just the ATO and its rules but also the IRS and different legal structures formed in the US. Too many variables to give an accurate number without going into clients specific circumstances and that job is best left for a CPA.

The cashflow report you posted in the example above allows for 40% of gross rents in the form of expenses.

 

Net returns are important
In saying this......Cant get these rental returns in Oz

Whats simply amazing is the growth/upside
I am out of Oz market but continuing to buy in US. Inventory is low, competition fierce just keeps driving prices north
As long as I am cashflowing from day 1 I will continue to buy



MTR

 

@euro73
Just thought I would mention that the corporate tax rates you posted in the thread do not apply for LLC's acting as disregarded entities. Most clients that I have do not elect for their LLC's to be taxed as corporations.

 

Of course people can confirm their tax position independently. But providing a template for guidance isnt unreasonable. At the very least the advertising should hold a disclaimer advising that the profits or net yields being promoted are subject to tax treatment relevant to individual circumstances. My point is that as advertised, the yields or profits are misleading.

I specifically referenced Australian Marginal Tax Rates. I specifically asked about the Australian Taxation Office treatment of income earned in the US. I have zero care factor about what clients from other nations are up to. Property Chat is an Australian forum with a majority of Australian readers.

But not taxes; Not State. Not Federal. Not Australian. The profits mentioned are inaccurate by a large amount if 15%, 32.5%, 37% or 45% is applied to them. They are not there. Nowhere to be found.

I'm not playing CPA. I'm playing responsible seller. I provide guidance which buyers are then directed to confirm with their relevant professional advisers ( planners, accountants) Can you imagine how I'd be attacked if I promoted NRAS or Dual Occ (which are both YIELD based strategies - exactly the same as I see US property being promoted) and then I omitted providing any guidance on the taxation treatment (neg gearing) My cash flow projections would be completely misleading, by a large margin. Why should I be held to that standard when selling in Australia but others not be held to that standard when selling in the US?

As I have said I'm for the US thing, but I think the numbers being promoted are loose .

 

Maybe because you're always promoting/selling, bit over the top sometimes IMO - but that's just IMO.

They're providing a different option, they don't have to promote the same as you.

They're completely entitled to run their business however they feel as long as it's not breaking any laws.

From what I see they're not hiding the fact that there are other costs involved, they suggest speaking with professionals who can give exact figures.

End of the day... caveat emptor

 

Ok so apply personal tax rates instead. For a person paying 37% MTR in Australia for example , it doesn't really change anything unless they are earning over 418K in the USA. On any amount less than that they may still be looking at paying 37% on the US "profit" , minus a tax credit for taxes already paid in the US at a rate of either 10%, 15%, 25%, 28% ,33% or 35%.

However you dice it and splice it, they may still end up paying 37% here if their tax arrangements are otherwise vanilla.
Doesnt matter whether 10% is paid there and 27% is paid here. It adds up to 37%.
Doesnt matter whether 15% is paid there and 22% is paid here. It adds up to 37%
Doesnt matter whether 25% is paid there and 12% is paid here. It adds up to 37%
Doesnt matter whether 28% is paid there and 9% is paid here. It adds up to 37%
Doesnt matter whether 33% is paid there and 4% is paid here. It adds up to 37%
Doesnt matter whether 35% is paid there and 2% is paid here. It adds up to 37%

Plus of course the the 4.25% Michigan State Tax ( if buying in Detroit) for which no tax credit or offset is received in Australia, according to @Handyandy . Bringing the potential total tax payable to 41.25%. And its not mentioned anywhere , by anyone advertising US property.

As you have suggested, that doesn't mean anyone will actually pay the 41.25%. They may have a clever accountant. I get that. But its not even mentioned that it may be payable, is the point.

 

Gee , wish you'd go so easy on others. That's extremely forgiving of you. Potentially a 40% + margin of error in the yields, but that's cool.... buyer beware.

Problem is, lots of these US sellers require you to put down non refundable "earnest" money before they show you a property...

How about I sell you something here in Australia @Brady, but before I show you any numbers you have to lay down several K of non refundable money. That gets you a set of figures that you can then go and pay your CPA or accountant to scrutinise and offer you advice on.... and if you dont like the way the numbers wash out, well so sad, too bad, your money is now my money. See ya. Have a nice day. I wonder how would that go down with you?

You are essentially being asked to take a leap of blind faith, based on numbers that potentially aren't accurate unless you can find and pay for the necessary tax and legal expertise to structure a sophisticated tax minimisation arrangement. For anyone unable to do so, some tax liability is very likely to be owing..whether there or here or in both places. That doesn't make the outcome a bad one...Im not suggesting anyone is acting improperly , but I think it does leave the experience wanting, and it does make the numbers seem a little "puffy". And it could be easily addressed with some commentary or guidance ( with all the relevant disclaimers) on the way the tax thing works.

There's another mob promoting 20% + yields in Detroit and charging 20K to access them. 10K up front. Non refundable before they even show you a property. But under scrutiny the yields are really 11%-13% . I mean, how does that not warrant a little scrutiny? Do we simply dismiss that as "buyer beware" as well...? Does the seller bear no responsibility whatsoever for even offering some generic commentary about possible tax implications?

There are a lot of readers of these forums without any real experience in these matters and who rely on "experts" to offer them guidance. I think there's a little bit of a moral responsibility to offer more care .....dont you?

Whether you like what I do or not, I sure as $h!7 dont hide from that responsibility .

As I've stated over and over again... I like the US thing. But every seller Ive reviewed provides numbers that are at best a little loose, and in some examples very loose. All because the taxes arent mentioned. And they needn't be loose. Just provide some sort of commentary that the yields may be tax affected. That's all.