Top 5 Tax Considerations for Non-Resident Landlords in 2021

Cross border real estate investment for many individuals fits into an overall diverse financial or retirement strategy. Whether you’re a Canadian resident buying a property in West Palm Beach, Florida to be rented out until you can retire as a snowbird, a nostalgic expat who would like to own a place in her favourite childhood vacation location in Whistler, BC, or a more calculated and focussed real estate investor, the tax issues are the same.

We have included the top five most common tax mistakes we encounter with new clients:

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Not filing a Non-Resident Income Tax Return to report rental income

Most individuals feel that because the rental property is operating at a loss, there is likely no tax to be paid 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 25 to 30% in Canada or the United States respectively unless an appropriate election is made on a timely filed tax return.
  • In the US, annual losses on the property could be carried forward to another tax year to offset (HUGE) future income or gains on the property and you only accumulate these losses by filing a Non-Resident tax return.
  • In Canada, this failure to file could significantly reduce your ability to close quickly on the sale of your rental property as a non-resident if you haven’t been subject to the 25% withholding above and haven’t filed a rental return because you will have to backfile returns OR pay the 25% on your gross rental at the time of sale.
  • You obtain a US Individual Identification Number (ITIN) or a Canadian Individual Tax Number (ITN) which will make selling the property (this is a whole other can of worms) less burdensome.
  • Not reporting the property on your “home country” Individual Income Tax return

    Yes, even if operating at a loss you should be including the income net of allowable expenses on your “regular” tax return.

    If the property is operating at a loss, and you meet the qualifying conditions to do so, the rental loss may be allowable as a deduction against your other taxable income, reducing your overall tax on your current year returns.

    In the US, even if your property is operating at a loss, you are required to calculate depreciation annually which can affect your overall calculation of gain or loss on final sale.

    Not disclosing the US rental property on your Annual Canadian Foreign Income Verification Statement

    If the purchase price of your share of the propertyplus the maximum value in your US based bank account and other foreign assets exceeds $100,000 CAD in the taxation year, you must disclose this ownership on Form T1135 – Foreign Income Verification Statement.

  • Failure to timely file the T1135 could result in a $2500 maximum penalty each year you owned the property.
  • 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) and additional rules in the US regarding vacation homes apply.
  • Not Identifying Other Tax Planning Opportunities or Issues

  • Investment in a US real property (rental or not) requires you to consider US Estate Tax.
  • Sale of property in either country can trigger different gains calculations due to different loss carryover and depreciation rules or foreign exchange.
  • Identifying differing income and expense treatments under Canadian / US Tax laws to manage potential double taxation.
  • 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 Canada or the United States as a non-resident and have ventured onto our page in your attempt to educate yourself on the tax implications of owning and renting Canadian or US real estate as a non-resident, rest assured that, with the right advise, the most frustrating and administratively burdensome period of owning and renting out a property is in the first 12 – 18 months, we can help.