JV Statements and Stock Options Tax Considerations with Cherry Chan

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Podcast Transcription

Georges El Masri [00:00:00] Thank you for tuning in, as always, I’m your host, George El Masri, and this is the well-off podcast where today I interview Cherry Chan. For those that don’t know Cherry’s an entrepreneur and author, blogger, a mother, an accountant, she specializes in helping real estate investors reach their investment goals. And on this episode, we covered a couple different things. We started off by talking about joint ventures and joint venture statements. So we broke down what those were and why they are often recommended to people that are in a joint venture. We also talked about certain things that the two JV partners should be aware of when it comes down to tax time. So a couple of tips and pointers there. And then we kind of moved on to hold cause and owning either a vehicle through your Holdco for a Holdco that owns real estate. And then also we talked about stock options trading. So buying under your personal name and also buying under a corporation. We talked we cover a couple of different things when it comes to options trading. So if you guys are into that type of thing, if you’re interested in kind of getting into the nitty gritty of tax stuff, then this is a good episode for you. And if you appreciate it and enjoy it, then please do share it with friends and family. We’re always here to hear your comments, and we would love to know what your thoughts are. If there’s anyone, you’d like to hear on the show next, please feel free to reach out to us. And as always, we appreciate you tuning in. We wish you all the best and enjoy the episode. Welcome to the Well Off Podcast. The goal is to motivate, inspire and share success principles, and for the second time, I have Cherry Chan with me. Most of you guys know her. She’s an account, specializes with real estate investing stuff and stock options and all that good stuff for you guys. So cherry. Welcome back. I appreciate you doing this again.

Cherry Chan [00:01:48] Thank you so much for having me again, Georges, and it’s an honor. It’s a pleasure to be back.

Georges El Masri [00:01:53] Great. So I usually start off by asking about your childhood, but you’ve been here before. So you told us last time I have like a list of questions that I prepared because I know you’re very knowledgeable when it comes to joint ventures, stock options, stuff. So I wanted to like, kind of dove right in. I know I might be catching you off guard with some stuff, but if you could just tell us whatever. Just give us your best shot for now that be great.

Cherry Chan [00:02:19] For the record, I did not get any of these questions beforehand. I hope I get it. All right.

Georges El Masri [00:02:25] It’s fine. Then just catching you off guard. But let’s start off with a joint venture statement. So I’m just kind of wondering, what’s your take on it? Why is it required? And obviously, just to put things in context, we’re talking about two parties that have bought real estate together. They have a cool venture agreement, and for my understanding, a joint venture statement is required as part of the accounting process. So can you kind of just break it down and explain to us what it is and why it’s required?

Cherry Chan [00:02:57] Well, I guess it is not a requirement per se. It is always nice to have. Essentially, joint venture is a business on its own. If, say, you and I form like join forces together to buy property. And let’s just use some simple numbers, like if we buy a property in Hamilton for like, say, five hundred thousand dollars and we put it in one hundred thousand dollars and we rent it out for four thousand dollars a month. Like we want to see what how this business and how this property is doing as a whole. And so the joint venture statement essentially is capturing how the business is doing. The standalone property is doing a joint venture actually extends toward owning multiple different type of businesses, not just related to real estate investment at all, but rather it is related to light all type of different businesses that multiple parties join forces together to form. So the reason why we want to have it is really just to show up to single out the type of performance that this business is doing. And do you need it to file your taxes? The reality is, once you compile that information and put it together in a financial statement format, single out that particular joint venture that we own together. What happened is that let’s say I own 50 percent. So my corporation that owns that property or my personal name, if I own it in my personal name, I will pick up 70 percent of the income and expenses, assets and my ability based on that particular joint venture statement. So that’s the reason why you create the whole and look at the financial situation of that business as well. I’ll with highest purpose, we pick up the income and expenses, assets and liabilities based on our ownership structure.

Georges El Masri [00:04:49] OK, so from what I’m hearing you say, it’s not required to file your taxes, but do you recommend doing it or is it kind of optional up to you if you want? At record or not,

Cherry Chan [00:05:01] it’s not required to make it like a financial statement. A notice to read it on it. But you still have to pick up your income and expenses, your respective income and expenses and put it on your tax time. You have to absolutely have to file taxes.

Georges El Masri [00:05:18] Yeah. Oh yeah, for sure. Yeah, OK. Yep. So that that would help also kind of break things down for both parties, like if you have a passive partner that just wants to see numbers, I guess this joint venture statement would help with all that making it simpler.

Cherry Chan [00:05:35] Yeah, absolutely. And it helps to explain year over year changes and all that stuff.

Georges El Masri [00:05:41] OK. And I know this is kind of a broad question. Maybe a bit generic, but what should from a tax perspective, what should joint ventures be aware of? Is there anything when it comes down to tax season? Anything specifically that JV partners should be aware of?

Cherry Chan [00:06:00] It’s the same thing for everyone when you are forming a joint venture to do business is the income that the money that you put into the joint venture account, whereas you are also as well as while your partner, the amount of money that you each put into the business account have to be reconciled. That’s number one. The number two thing is that one thing the income and expenses, the cash coming in and then also the cash going out are generally relatively simple. The only thing that may make a huge difference is a capital improvement that you’ve made to the property. The reality is that sometimes you get a statement of income and expenses from maybe your joint venture partners accountant, and they only capture one side of things because some of the repairs and maintenance that you do, they are considered capitalized item and it has to be improved. Am sorry, it has to be capitalized as capital improvement being added to the cost of the building, and that part of it is often not capture on a statement of income and expenses. And so for you to reconcile the box is impossible. My experience is with joint venture accounting. Reconciliation is that one. It is that the amount cannot be reconciled to the amount that you put to the joint venture. Number two is that those of those capital improvement, they are typically not presented to the passive income partner site. It’s harder to capture those. And the third thing is that the third item that could be an issue is that if your joint venture partners year end is different from your year end and when you do the adjustments in terms of life, for example, capitalize some of the rules that has been replaced. If you do decide to do it and typically it’s being done at the end of the year when whoever that’s responsible for the wealth. But then sometimes the joint venture partners a Carlton file. The tax returns have a different year in July versus December. So that it may not have captured the right amount of information there. So those are the type of timing differences that you have to watch out for.

Georges El Masri [00:08:17] So would it be a good idea for both partners to connect to their accounts, to each other so that they’re able to communicate about the year end and that type of thing? Or does it not make sense to do that?

Cherry Chan [00:08:30] Well, it would be awesome to connect the two up to each other. The reality is that the calendar would be able to pick up things that are that are from the general ledger. So General Ledger is the detailed transaction in every single account. So if you keep the bookkeeping record up to date and the person that’s responsible to keep track of that record should be able to provide the general ledger the entire sets of books to both accountants, it could be the bookkeeper, but it could be provided to both accountants. And then you would be able to see the documents, and the good accountant would be able to pick up the information that they need to file the taxes and use it as a support as well. And the reality is each of you should, as joint venture partner, each of you should really keep a copy of the records. Otherwise, like if CROI ever audits both of you, how do you justify the difference between the two, right?

Georges El Masri [00:09:27] Yeah, absolutely. OK, so those are some good tips there. Just for things to look out for on tax season, obviously, like you have your own account, so you pick who you work with, but sometimes you don’t really know who your partner might be working with in their account may not be as knowledgeable when it comes to this stuff, so really good things to keep in mind. So I wanted to shift a little bit towards options trading because I know you guys do a lot of that on your end. But actually, sorry, before we do that, I just have one more question. So if you do have a holdco that that is holding real estate like properties, are you able to purchase a vehicle under that holdco for and write off the vehicle?

Cherry Chan [00:10:18] That’s a million dollar question, typically, if you have the whole call and only activities is to manage a holding company, owning the properties, owning the automobile vehicle, it directly inside a hotel would not make sense. The reason is because without a license tax to the individual shareholder for the corporation for the availability of the copy used by the shareholder. So they like essentially the corporation bought the car and the corporation is making it available for you to personally use it. And that doesn’t make sense, and sociology doesn’t like that. And then they would calculate some taxable benefit being added to your personal tax return, all of it to essentially to tax you on the availability of the car being available for you to use. So, OK, got it.

Georges El Masri [00:11:14] So it’s not feasible to purchase a car under a holdco. It wouldn’t necessarily be beneficial.

Cherry Chan [00:11:23] No, there are times that it could be beneficial. But for the majority of residential real estate investors, it’s hard to justify that the car is like 80 percent, 90 percent used for the purpose of running the residential real estate portfolio, right? Yes, I do have a client who owns the vehicle in his corporation and is also a whole call. But it is. It is an interesting whole call because property, the underlying property was it was a distressed property. And so he actually put in $2 million to restore it, and he’s always traveling to the town to restore that property. And that’s completely different, right? Because he always uses the vehicle to essentially to run the operation. Yeah, for that business and now the property, it was purchased for three hundred and fifty thousand dollars now is worth like to point something out to put in a couple of million dollars to fix it up. The reality is it really goes back to your particular situation.

Georges El Masri [00:12:25] Yeah, yeah. Well, then the question is after that, renovations over, then wait, the cars you no longer use necessarily for that project

Cherry Chan [00:12:35] in his in his in his situation, he has a better argument. He has multiple vehicles in his personal name. OK, so that’s also another argument that you would have really if you have vehicles in your personal name and you guys are using the two vehicles for your personal use. And the only time you would drive that truck is when you drive to the town to handle all the tenant’s complaints of repairs and improvement that you have to do. Yeah, that’s two different story.

Georges El Masri [00:13:01] Got it. OK, that makes sense. And maybe along that line, can you do it in a PreK? Can you own a vehicle in a PreK?

Cherry Chan [00:13:10] A lot of real estate agents that I work with, they do quite a bit. They do. They do drive quite a bit for their real estate agent business. And again, at the end of the day, the amount of set by choice that’s being reported in your personal site or being calculated by Sealy, it is truly based on that non-business use of the vehicle. Mm hmm.

Georges El Masri [00:13:30] Got it. Okay, perfect. I appreciate you sharing that little bit of that little side question there before we go on to options trading. The question now becomes are you able to for a while? For those that don’t know about options trading like you guys do, quite a bit of that. You teach a lot about how to do it, but obviously it has to do with trading stock options. So it’s typically for my understanding, taxed as a capital gain. So I was one of the questions that I had was at some point, if you do enough stock options trading, could it be looked at as taxable income that as opposed to a capital gain?

Cherry Chan [00:14:14] So to step back a little bit. Income means is 100 percent taxable. Yeah, it is capital gang. It means it’s only 50 percent of the profit that you make would be hostile at any given point in time. You want to be able to argue that income that you are getting as capital gain because you pay essentially half of the tax. Yeah, or sometimes more than half of the tax, because depending on what your marginal tax rate is now, the reality is that it’s not at the beginning a lot of the investor for under the category of reporting it as capital gain. But the reality is that many people have evolved and have moved on to do a lot more complicated trading. And that includes like doing day trading and doing a lot of spreads. And so those incomes would be then considered income, not capital gains. So it really goes back to your particular situation and your trading habit, how much time you spend. In terms of trading. And how often you do those trays and what kind of strategies are doing? And a lot of the time, if there is no underlying stock attached to the trade. See how it could look at it as if it is an income transaction. Mm-Hmm. Not going not on the account capital.

Georges El Masri [00:15:38] Sure. So it depends on you, every individual person. How much or how much trading are you doing? If you’re like trading for 10 minutes a day and you have a full time job and you’re generating income other in other ways, then it’s probably a capital gain.

Cherry Chan [00:15:54] But yes, and with a word of caution that 10 minutes, if you do like 20 trays and every single day you, you do the same way. If, like some people do, like zero day trading, zero expiry date, they trading and they only do it three days a week because they do it on the index and only because the other option expiring on three days a week. And they do it. They get in and they get all by the end. By lunchtime, they get in. First thing in the morning, they get out by lunchtime. Those are still they trading, even though you spent only maybe 10 minutes a day. So I don’t want to just generalize it. It really also goes back to the strategy that you’re using.

Georges El Masri [00:16:39] OK, understood. So it’s never like a yes or no. It’s always the case by case. Always depends on what you’re doing.

Cherry Chan [00:16:47] Yeah, exactly.

Georges El Masri [00:16:48] OK, fair enough. Now what about tree? I do an options trading under a corporation, under a holdco. Can you kind of explain what that looks like?

Cherry Chan [00:16:57] It’s the same symbol icons of what they are, you have whole coal trading, depending on what other things that your company is doing. If you have other businesses and you are using, you’re just trading, putting some transactions through the corporation. Some of your trading activity through the corporation, it could still be classified as capital gain. Again, it goes back to the strategy that you’re using. It goes back to how often you try. It goes back to what other businesses are in that holding company. It might just have nothing in it. It might have of what you just set up the corporation just to trade. That’s very different from a business that already has it has its operating business and generating cash flow and those come into play. And if it’s let’s say it is a company that already has a running ongoing operation and is just using the excessive excess cash flow to do the trading, then you could argue that it’s a long term investment, depending again going back to the strategy and also frequency of trade and all that. And if it is considered to be capital gain, then 50 percent of it would be taxable. The other 50 percent would not be taxable.

Georges El Masri [00:18:12] Sure. Now what would be the benefit of trading in Holdco as opposed to in your personal name?

Cherry Chan [00:18:19] The same idea as if you are looking at a corporation to own real estate investment, right? And the number one thing is, hey, are you thinking of fair trading if you’re doing day trading day type of investment? Then the reality is, you know, like you, if you put it all in your personal name, it could be some potential. But if you would put it in a corporation, it could be as low as twelve point two percent. So it really depends. Now, the second part of it is where the money was originated from. Right? Like, if you have the property, let’s say you have the property refinance and you pull out like $200000 from the rental properties and now you want to try. And that property is only in the corporation. And if you take the $200000 a refinance money out, you will have to pay tax on it. Depending on how you take the money out of there is the chance that you have to pay to pay that personal tax on it. And if you don’t want to pay personal tax on it, then you can leave the money in the corporation and Detroit. Rightly in the corporation, there’s no other layer of personal tax. So those factors come into play. It’s not just, you know, like, Oh, it’s better to trade in a corporation than there are other factors as well.

Georges El Masri [00:19:40] OK, understood. And then so if somebody wants to kind of understand what would be better for them, would it just make sense to consult with you? And then you would kind of give them some advice, whether they should trade in their personal names or in the corp?

Cherry Chan [00:19:54] Yeah, absolutely. They can consult with my team and then my team will sit down and look at the big picture. And there are opportunities for income splitting as well. If you have a low income spouse doesn’t necessarily need to do it with by their corporation. But there are ways that we can. We can work with our clients. Map adult.

Georges El Masri [00:20:17] Right? Awesome. OK. So those are really the things that I wanted to discuss, because I know last time, you’re on the podcast, we touched on a couple of different topics. But is there anything that comes to mind that you would want to share or discuss before we would move on to the next section?

Cherry Chan [00:20:36] Well, there a late night,

Georges El Masri [00:20:38] yeah, the next. It’s a short section, which you did last time, too.

Cherry Chan [00:20:42] Oh, OK. So I’m just going to shamelessly self-promote if you guys want to find out more about tax information, you can always go to real estate tax tips dossier. And that’s going to give you some free guys to download. And I haven’t been able to really write any free tax tips on stock options trading yet, but all the information are there related to bursty investment. I recently also start started a YouTube channel. It’s real estate tax tips. If you go to your YouTube.com site was the of steps that light mine will show up, and that essentially provides a lot of positives, a lot more diversified tax tips, including lifestyle options trading, including the use of TFSA and RSP and all that other information.

Georges El Masri [00:21:32] Yeah, yeah. I’ve seen some of your videos. You guys have a nice, like, nice production going. You got the high quality cameras, everything going. So that’s awesome that you started doing that. I was going to jump to the random five. So I’m going to ask you five questions and you just tell me the first thing that comes to mind. So the first one is what is one thing people would never guess about you,

Cherry Chan [00:21:55] but I’m an introvert. Hmm.

Georges El Masri [00:21:58] OK. Yeah, I guess I wouldn’t have thought that either. Number two, what’s the strangest thing you ever did in high school?

Cherry Chan [00:22:09] I mean, I have like three different high school that I went to, went to school in Hong Kong. I went to school here. I guess the strangest thing is that I went to the worst high school in North York. Oh, OK, worst high school. Yeah, I don’t think it’s necessarily strange, but it’s rather crazy. But it’s it. Our intention was to get into the best high school, but because we didn’t know that we were living cells of French instead of north of French, north of think will get us to the nicest high school and then sell the French would get us to the worst high school where the shooting happened. Yeah. Yeah. Yeah.

Georges El Masri [00:22:47] OK, that’s a good story. Number three, what technology are you most hooked on?

Cherry Chan [00:22:54] I think it’s technology in general. Anything I can improve my productivity, make my life easier. Anything doesn’t have to be a particular app, not necessarily Instagram or anything. It’s just I’m always about making our lives easier.

Georges El Masri [00:23:10] Yeah, for sure. I know that was so last time you were on the podcast; we were talking about a lot of the apps that you use like Pluto and some of the other stuff. Yeah. Number four, who’s the most interesting person? You know,

Cherry Chan [00:23:23] the most interesting person that I know would have to be someone that does everything as well. Yeah. But I’m trying to be one of those interesting person, but it’s hard.

Georges El Masri [00:23:36] Yeah, yeah.

Cherry Chan [00:23:37] So I got really inspired by my partner’s. A sister who will now ski are like Diamond Whistler. And she does photography, and she’s also a very accomplished medical doctor herself. So she actually spent all the money getting herself private lesson, while her kids are also getting some group lessons like, for example, learning how to ski. So I’m trying to do something similar to that is essentially I’m taking up skating lessons to skating lessons, learned how to ski and trying to take skiing lessons, learning how to ski. And it’s just we’re paying so much for the kids and we’re there anyway. Why not learn a different skill?

Georges El Masri [00:24:23] Yeah, yeah. Just expand your brain. Get smarter and better. Yeah, yeah. Cool. And the last question is, what’s the most fascinating fact? You know, I don’t.

Cherry Chan [00:24:34] I don’t. I don’t think it’s fascinating. It’s so sad that we only have limited time in life that we have so much time, only so much time left in our lives, and that we really have to live our life to the fullest and we have to be intentional to live it to the fullest.

Georges El Masri [00:24:51] Absolutely. Yeah, that’s great. So there we go. Do you want to tell people how they can reach you and what services you provide?

Cherry Chan [00:25:01] OK, that’s a great question. I kind of like shamelessly already poor mobile, but you can always go back to real estate has that K and then I would be there.

Georges El Masri [00:25:11] OK, awesome. So that’s your contact. Obviously, the services you provider, accounting services and like we mentioned, you guys do a lot of like options trading courses, that type of thing. So if you guys are interested in learning more about that, check out real estate tax tips. Cherry, as always, I appreciate you and all of the knowledge and everything you share. Thank you for your time.

Cherry Chan [00:25:34] Thank you.

Georges El Masri [00:25:35] As always, thank you for listening, I hope you enjoyed the content, and if you did, I ask you to share this with a friend with a family member, somebody who might benefit, and it’s always appreciated if you can leave us a review, especially if you’re listening to it on the Apple Podcasts app or if you’re on YouTube, give us a like subscribe comment and your support is always. Appreciate it. Thank you very much.

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