La Quinta, CA
(760) 895-3516

Saturday, April 11, 2015

U.S. Taxation on Canadians with Rental Real Estate in United States

Taxes for Canadians With Rental Property in U.S.

So you have purchased or are considering purchasing a property in the United States for the purpose of creating rental income. Here's where to start:

1. Figure out your filing status for U.S. Income Tax

2. If non-resident, choose if you will file a 1040NR or opt for the 30% withholding tax

3. For first 1040NR, apply for ITIN

4. For filing 1040NR, file Form W-8ECI BEFORE payments & every 3 years of ownership

5. File your 1040NR with Schedule E if you have elected to do so

5. Deadlines & Rules

1. Filing Status:

If substantial presence test met, you must file a 1040 and declare all worldwide income including your rental income UNLESS you file a form 8840 determining that you are not a U.S. resident. If you are a "non-resident" for U.S. tax purposes, you have 2 options:

2. a) OPTION 1: 30% withholding tax on GROSS rents

You can choose to have your gross rental income taxed at a flat 30%, but this option does not permit for deduction of any expenses. In many cases, this can be a very expensive option. Under this option, you do not have to file a U.S. tax return to report this rental income. However, you will still need to report the net rental income on a Canadian tax return. Foreign tax credits can be taken to eliminate double taxation, but it is possible that the full 30% U.S. withholding tax will not be recouped.

b) OPTION 2: Net rental basis

Alternatively, you can elect to file a U.S. non-resident income tax return (Form 1040-NR) on a net rental income basis and complete Schedule E. Net rental income is defined as gross rents less ordinary and usual expenses, including property taxes, mortgage interest, insurance, management fees and utilities. It must also be noted that, unlike in Canada, U.S. tax laws impose a mandatory deduction for depreciation for U.S. tax filing purposes. The benefit under this option is that your net rental income amount, subject to U.S. tax at your marginal tax rate, will likely be substantially lower than the gross rental income amount subject to the 30% withholding tax. If you elect to file on a net rental basis, then you will need to complete Form W-8ECI to avoid the 30% U.S. withholding tax. Form W-8ECI needs to be submitted to your tenant or to a U.S. agent (not to the IRS).
Also, it should be noted that you cannot make this election on a net lease where the tenent pays the things a landlord would normally pay such as property taxes, repairs & maintenance, insurance, ect. Net leases are common for commercial property but not residential.
**Special note: Once you file under the net rental basis, you MUST do so for then entire period you own the property UNLESS you get consent from the IRS. So if you are planning to rent the house out for 5 years and then live in it, make sure you let the IRS know what you are doing when the time comes for you to move into it.

3. You NEED an ITIN to file U.S. taxes

You will need an individual taxpayer identification number in order to file taxes in the U.S. unless you have a greencard or you are an American citizen and have a SSN. That's a whole different can of worms, we are assuming you are a Canadian citizen with no greencard. We will help you file for your ITIN so that you can file your tax return.

4. File a W-8ECI BEFORE you receive payments from rental income

If you elect to file the 1040NR, you are required to file a W-8ECI to your payer BEFORE you receive any payments. This form is good for the rest of the tax year you filed it in as well as 2 additional years. I.E. You file in September, 2012 so the form is good December 31, 2012; December 31, 2013; and December 31 2014. On January 1st, 2015 it is no longer valid, so you'd best file a new W-8ECI to the payer so they have a current form on January 1st, 2015.

5. File your 1040NR & Schedule E

File your 1040NR income tax return along with Schedule E. We prepare your tax return for you!

6. Deadlines & Rules for filing U.S. income taxes

  • Deadline for sending money owed for taxes is April 15th of the following year.
  • For taxpayers outside of the U.S. your 1040NR & Schedule E are due June 15th. If you elect to file a 1040NR... LOSS OR GAIN, YOU ARE REQUIRED TO FILE!
  • If no return filed after June 15th of the following year you decided to rent the home out, the clock starts ticking. You have a 16 month grace period. After 16 months, you have forfeited your option to use the net rental basis on your property ever again. You would then be forced to use the 30% gross method.
Regardless of your situation, if you own a rental property in the U.S. as a Canadian, give us a call.
Borders Bookkeeping
(760) 895-3516