If you are a Canadian resident intending to buy a residential property in the United States it is important that you are aware of the following tax implications particularly if you intend to rent it for any period of time during the year.
A non-US resident owning a US residential rental property may elect either of the following options:
OPTION ONE: ELECT TO PAY TAX EQUAL TO 30% OF THE GROSS RENTAL REVENUE
This option makes little economic sense.
Option TWO: Elect TO HAVE RENTAL INCOME TAXED ON A RENTAL PROFIT BASIS
In order to avoid the 30% gross revenue tax on your US property you must file form W8-ECI (Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United State) and provide a copy to the rental manager or person renting your property. The W8-ECI completed by the renter and all tax returns must be filed with the IRS within 16 months of the date the tax return was due.
If you elect to pay tax on a net profit basis you are required to file a US personal or corporate tax return to determine the amount of US tax owed. If you elect this option you will need to apply for a US tax identification number, or Individual Taxpayer Identification Number (ITIN).
The net rental profit on your US real estate is calculated as the gross rental income less ordinary and necessary expenses.
The following is a list of the common expenses that are allowed.
- Auto and travel
- Cleaning and maintenance
- Commissions
- Insurance
- Legal and other professional fees
- Management fees
- Mortgage interest paid to banks
- Other interest
- Repairs
- Supplies
- Taxes
- Depreciation: In the US, residential rental property is depreciated over 27.5 years on a straight-line basis. Unlike Canada, you must take depreciation expense on a US rental property. If you fail to take depreciation on a US rental property the IRS will still deem it to have been taken at the time the property is sold.
If you intend to use a US residential rental property for personal purposes in any tax year you should be aware that this may have tax certain tax implications depending on the amount of time you use the rental property. These tax implications may have relatively little impact for a short vacation but residing in the US for a prolonged period can result in a non-resident being deemed by the IRS to be a US resident and taxed in the US on worldwide earnings. The formula for determining whether or not you are deemed to be a US resident is cumulative and includes time spent in the US over a three-year period.
If you intend to spend any significant amount of time in the US it is important that you contact one of our international tax specialists. Our tax experts can assist you to file the necessary IRS forms to apply for exemption from deemed resident status on the basis that you have a closer connection to Canada.
This article has outlined some of the concerns with US federal regulations that a Canadian resident might face when purchasing a US property. You should be aware that each state has similar or parallel regulations. Unlike Canada, however, the US Government does not act as a tax agent for individual states nor are regulations consistent from state to state. Each state must be dealt with separately according to its own particular regulations.
The greatest problems arise from not knowing or not fully understanding US requirements and regulations. Even innocent mistakes may result in severe tax repercussions. Failure to comply with US tax requirements and deadlines can result in dis-allowance of expense deductions, monetary penalties, and even criminal prosecution.
If you intend to buy a house or purchase an investment property in the United States, AccXpert TaxServices can offer some guidance on the different federal and state regulations and o prepare all your ongoing cross border tax filings to ensure that you can enjoy the worry-free ownership your US residential property.
For more information, please contact us at TaxServices@AccXpert.com, or call us at 1-613-600-6988.
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