For many Canadians who own property in the United States, renting those properties while not in use is a good way to generate income. However, owning a residential rental property means you are subject to U.S. income tax on any property income you receive.
Ensuring that you are complying with the Internal Revenue Service’s (IRS) tax reporting standards and adhering to tax requirements and legislation can be challenging for many property owners. That’s why partnering with a highly knowledgeable tax expert is essential to remaining compliant and taking advantage of allowable deductions.
With over 50 years of combined experience, the trusted professionals at Edelkoort Smethurst CPAs LLP can guide you through the tax method that best meets your unique needs.
Expert Tax Solutions for U.S. Rental Property Owners
Many Canadians own property south of the border, and it’s important that property owners have a firm grasp of their tax obligations, especially when it comes to rental income. Whether you own and rent an apartment, condominium, or house, you will be expected to pay U.S. income tax on any rental income. However, there is an exception, provided a vacation rental is let out for less than 15 days. Otherwise, any rental income that isn’t earned in connection with a trade or business be reported per one of the following two options.
Withholding Tax on Gross Rental Income
Canadian U.S. property owners can opt to have their gross rental income taxed at a flat rate of 30%. However, this method has the potential to be overly costly as it does not allow for deductions based on operating expenses. While this method means you will not have to file a tax return provided you submit an accurately completed 1042-s form, you will be required to file a Canadian income tax return and pay Canadian tax on a net rental income, meaning a gross rental income is reported on your Canadian tax return, then, after rental expenses are deducted, tax is paid on the balance. Foreign tax credits can be applied to ensure there is no duplicate taxation. However, there is a possibility the full 30% withholding tax will not be entirely recovered.
Net Rental on a Non-Resident Tax Return
Canadians with rental properties in the U.S. can also choose to file a U.S. non-resident income tax return on a net rental income basis, which allows individuals to pay on their gross rentals less expenses. Those expenses can include:
- Insurance
- Mortgage interest (not principal)
- Property taxes
- Repairs
- Supplies
- Management fees
- Utilities
Unlike Canadian tax legislation, U.S. tax laws require a mandatory deduction for depreciation with specific rules to claim rental losses. Considered a passive activity loss, a loss from a rental property can only be deducted from passive activity income like rental income or the earnings from selling a rental property. Also, if the depreciation is not used, it can not be banked for future use.
While both methods have value, this option will require property owners to fill out the appropriate form to avoid the 30% withholding tax, and they will also be required to apply for an Individual Taxpayer Identification Number (ITIN) from the IRS to complete their tax returns.
Quality U.S. Tax Strategies to Meet the Needs of Rental Owners
When it comes to buying, selling, and renting properties in the U.S., there are a host of rules and legislation that must be adhered to on both sides of the border. The trusted tax experts at Edelkoort Smethurst CPAs LLP have extensive experience and the necessary credentials to help you determine the best tax solution to suit your needs and meet your goals.
Ensuring that you are completing the necessary tax filings for your situation can be a struggle. These transactions can be very complex and often involve ‘foreign tax credits’ to avoid duplicate taxation. We can guide you step-by-step through the process so your filings in Canada and the U.S. are compliant while also minimizing tax expenses.
Contact Edelkoort Smethurst CPAs LLP in Burlington for Experienced Cross-Border & Real Estate Tax Services
Edelkoort Smethurst CPAs LLP in Burlington can provide guidance on cross-border tax obligations and assist you or your business with all real estate and U.S.-based tax filings. Our CPAs are highly skilled and serve the local Burlington business community with professionalism and a dedication to excellent service. To speak with one of our knowledgeable Chartered Professional Accountants, please contact us online or by telephone at 905-517-2297.
