It’s an amazing investment for your retirement plan they said. Florida Condos are “on sale” they said.
It sounds amazing, and it can be, but rest assured it is not for those less interested in jumping through various hoops created by not only establishing cross-border ownership of rental properties but also in the administrative requirements involved with the finance, tax and management side of owning property out of country. But, then, if it was easy, everyone would be doing it.
When we are contacted by Canadians owning US real estate, most individuals have already jumped through the “financial” hoops of buying the property. It then becomes our job to assist them with understanding the US (and Canadian) tax implications of owning and renting out the property.
We have put together the top 5 TAX issues we often solve for non-resident alien landlords of US real estate who contact us for assistance:
- Not filing a US Income Tax Return to report rental income – most individuals feel that because the rental property is operating at a loss, there is no tax and so they feel they needn’t file a return. WRONG. Here are a few reasons to file:
- Rental income could be subject to a flat tax of 30% in the United States unless an appropriate election is made on a timely filed US return.
- Annual losses on the property could be carried forward to another tax year to offset (HUGE)future income or gains on the property
- You obtain a US Individual Identification Number (ITIN) which will make selling the property less burdensome.
- Not reporting the property on your CANADIAN Individual Income Tax return – yes, even if operating at a loss you should be including the income net of allowable expenses on your Canadian Income Tax return.
- Not disclosing the US rental property on your Annual Canadian Foreign Income Verification Statement – if the purchase price of your share of the property plus the maximum value in your US based bank account through which you pay bills exceeds $100,000 Canadian in the taxation year, you must disclose this ownership on Form T1135 – Foreign Income Verification Statement. Here is why it is important:
- Failure to timely file the T1135 could result in a $2500 maximum penalty each year.
- If the property is operating at a loss, the rental loss may be allowable as a deduction against your other taxable income.
- Deducting Mortgage Principal Payments as Interest – ONLY interest is deductible, not the principal repayments.
- Not allocating expenses for Personal Use of the Property – personal use of the property could be by the owner, family, friends or in home swap.
- Both the Canada Revenue Agency and the Internal Revenue Service require you to prorate your rental property expenses if you have personal use of the property (i.e. you cannot claim the personal portion of certain expenses)
- Vacation home rules apply to the reporting of income and allocation of expenses on property used for personal purposes in the US.
For the most part, we can assist you in solving all of the above issues on past filings (or failure to file) and in many cases there are programs and procedures that can be entered into to mitigate the risk of additional tax or penalties resulting from failing to make the appropriate elections, disclosures or filings.
If you have just purchased a property in the United States and have fallen on our page in your attempt to educate yourself on the tax implications of owning and renting US real estate as a non-resident of the US, rest assured that, with the right advise, the most frustrating and administratively burdensome period of owning and renting out a property in the US as a Canadian is in the first 12 – 18 months. Contact us and we can help you get through it.