Congratulations on the purchase of your Florida property rental! The following information is not an exhaustive list, but are the key concepts and points that you should consider. Please bear in mind that tax laws are subject to change, so you are cautioned that these rules may be different in the future.
Disclaimer – This article is about the U.S. and Canadian tax consequences of Canadian residents owing and renting Florida Rental Properties. Readers are cautioned that information in this article is for general purposes only and does not purport to provide specific advice. Individuals should consult with a tax professional. The author bears no responsibility for the use or dissemination of this information.
Subject: Florida Vacation Rental Property – Tax Guidance Letter
1. US Income tax
If you are a Canadian citizen and resident and own residential rental property in Florida, you are subject to U.S. income tax on any rental income you receive from your U.S. real estate property. To comply with this Internal Revenue Service (IRS) tax reporting requirement, you may choose one of the following two methods to report the U.S. rental income:
a. Gross Revenue Method – 30% withholding tax, no U.S. income tax return required.
b. Net Rental Method – requires filing of U.S. income Tax return. i. US Income Tax (Form 1040NR, including Schedule E – Supplemental Income and Loss from real estate rental) is used to report the Florida property rental income to the IRS (Internal Revenue Service). Filing deadline Jun 15th of the following year. Extensions are available. ii. Joint ownership – requires two separate U.S. income tax returns. However, if more than one property is owned, both properties can be reported on the same return. iii. Deductible Expenses – ordinary and necessary in the operation of rental business. Includes; advertising, cleaning, maintenance, commissions, insurance, tax return preparation fees, management fees, mortgage interest, repairs, supplies, property taxes, depreciation and utilities. Travel expenses to Florida are deductible, as long as the primary reason for the trip is business. iv. Capital assets – home and major expenditures are not immediately expenses, but are depreciated over many years. The number of years depends on the asset. The home itself is depreciated over 27.5 years. Cannot “accumulate” depreciation – must use it, or lose it (different rules in Canada). Land is not depreciated.
The U.S. Internal Revenue Service (IRS) requires ‘Non-resident Alien’ property owners who rent out their properties for more than 14 days per year to have an Individual Tax Identification Number “ITIN”. A separate ITIN is required for each part owner. Form W-7 is used to apply for the ITIN.
3. Form W-8ECI
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 is used if the rental income can be demonstrated to be effectively connected income (ECI) to a U.S. Trade or Business, which allows for taxation at graduated rates ranging between 10-35% depending on the amount of taxable income. Foreign persons that own real property in the United States and rent it out may be considered to be engaged in a trade or business if the activities related to their investment are regular, continuous and substantial. Form W-8ECI needs to be submitted to your tenant or to a U.S. agent (not to the IRS). This allows the management agent to pay you your gross rental income. Without the withholding exemption your management agent should withhold 30% of your rental income on behalf of the IRS.
4. Florida County Tangible Personal Property Tax “TPP”(Form DR-405) – Deadline April 1st
The county property appraiser’s office levy a TPP tax based on the value of the personal property (furnishings/appliances) used in your rental, the Return is filed by 1st April. An exemption on the first $25,000 of the value is available.
5. Florida County Real Estate Taxes
The county property appraiser also administers the annual assessment of Real Estate taxes based on the value of your house and land on the 1st of January. These tax invoices are issued in November.
6. State of Florida Sales & Tourist Development Taxes
a. Sales Tax – If you rent your property for periods of less than six months you will be required to collect and pay sales tax to the State of Florida, Department of Revenue (currently 6 percent). Your management company will usually collect and report all sales tax for you on the rentals they handle. Owners who rent their own properties should collect sales tax and communicate these actions to their management companies for reporting purposes, or pay the sales tax direct to the State of Florida.
b. Tourist Tax – Tourist Development tax must also be collected and paid monthly to the county in which your property is located (up to 7 percent in some counties). Again your management company will usually take care of this for you.
c. Sales tax and tourist development tax must be collected on all rental income from properties located in Florida regardless of where the rent is collected. On long term rental periods of longer than six months you are not subject to these taxes.
7. Sale of U.S. property
a. Capital gains are fully taxable in U.S. (different rules in Canada). U.S. capital losses are limited to $1,500 in year, but can be carried forward into future years.
b. The IRS requires that 10% of the gross sale price is withheld from the seller’s proceeds. However, due to depreciation, mortgage interest and other operating deductions, your rental property will probably have generated a tax loss when being rented. These losses are accumulated on Form 1040NR and carried forward to reduce future income or gain from the sale of the property.
c. Form 8288-B, Application for Withholding Certificate of Dispositions by Foreign Persons of U.S. Real Property Interest should be filed prior to completion of the sale so as to reduce or eliminate withholding under section 1445. If you do not file the Form 8288-B prior to completing the sale you report the sale of your property on your 1040NR, the withholding tax is reported as a credit. This credit is applied to any tax due from gain on the sale of your property and any excess will be refunded to you. If you have no gain, all of your withheld tax will be refunded to you. Form 8288-B MUST be filed before closing the sale of the property. Generally, if there is a gain from the sale of your property owned for more than one year it will be subject to a maximum capital gains tax rate of 15%.
8. Canadian Income Tax
Canadian (permanent) residents are taxed on their worldwide income, and this would include the Florida rental property. Canada Revenue Agency (CRA) has specific regulations pertaining to property rentals that must be followed. Some of the most important of these are summarized below.
a. Rental Income / Expenses are reported on a separate Schedule (T776 – Statement of Real Estate Rentals).
b. Deductible expenses follow similar rules conceptually, but there are differences.
c. Buildings can be depreciated using Capital Cost Allowance (CCA) rules specific to the type of asset. Typically CCA for buildings acquired after 1987 the CCA rate is 5%. CCA rate for buildings acquired before 1988, the CCA rate is 4%. There is “half year rule” in the year of acquisition (transfer of use). CCA not claimed in a year, can be carried forward.
d. Each rental building must be place in a separate CCA class if the cost of the building is greater than $50,000.
e. CCA is deductible, but CCA cannot create a rental loss for the taxation period.
f. Land cannot be depreciated.
g. Borrowing expense (interest) is deductible for tax purposes, but not principal. If there is a mortgage underlying the property, it is important to obtain a schedule from the lender indicating the interest vs. principal components of the payments made for the taxation period.
h. Operating expenses such as; maintenance, utilities, and other reasonable business expenses. There are specific regulations pertaining to expenses which are allowable and not allowable. For instance, Home office expenses are not allowable deductions, nor any personal expenses.
i. Personal occupation of a rental unit – claiming a percent of personal and business use – there are specific CRA guidelines.
j. Renovation expenses – some can be deducted as operating expenses, but other expenditures which increase the “economic life” of the building are capital in nature and would follow CCA rules for tax deduction. It is important to understand the difference.
k. When a property is co-owned, each co-owner owns a part of it and must individually report rental income according to the proportion owned.
l. Sale of rental unit:
• Capital Gain / Losses – there are specific guidelines on “Proceeds of Disposition” and “Cost Base” that support this calculation.
• Terminal loss
• Recapture of CCA
Maintaining proper records, receipts of expenses. This is very important as it directly impacts the preparation of income tax returns. GFS can provide bookkeeping services to generate profit and loss statements, balance sheet for internal tracking, and to support tax preparation.
Please click here for further information on Canada Revenue Agency and Internal Revenue Service taxation considerations pertaining to Canadians with USA rental properties.
I hope this provides the information and guidance you require.
If you require further assistance, please contact my office to schedule an appointment. I don’t mind talking to you for a minute or so as an introduction. If you prefer to have a tax consultation prior to engaging my services, there is a fee for this service. The fee for a 1 hour consultation is $300 + HST during which time I will provide an in-depth review your situation, and provide specific tax guidance. I would greatly appreciate the consultation fee being paid at the time the meeting via personal cheque, credit / debit card, or e-interact. Thank you very much – I look forward to hearing from you and supporting you with your income tax filings.
Gary Schein, CPA, CGA, MBA
IRS Registered Paid Tax Preparer and IRS Certified Acceptance Agent
Edelkoort Smethurst Schein CPA’s LLP
Chartered Professional Accountants
4903 Thomas Alton Boulevard, Suite 207
Burlington, Ontario, Canada L7M 0W8
Edelkoort Smethurst Schein CPA’s LLP, is Fully Registered in Public Practice with the Certified General Accountants of Ontario to provide Corporate and Personal Taxation, and Financial Statement Compilation services to the public, is an authorized Canada Revenue Agency (CRA) e-filer, and is also an Internal Revenue Service (IRS) Registered U.S. Paid income Tax Preparer. Gary Schein of Edelkoort Smethurst Schein is an IRS Certified Acceptance Agent. Geoff Smethurst is a Licensed Public Accountant (LPA) – the firm provides review engagement and audit services.