When considering the purchase of a U.S. property as a rental investment or a vacation property, it is important to understand the U.S. tax implications as a foreign owner.
Canadian resident taxpayers are required to report their worldwide income, including rental income and capital gains from U.S. properties. However, the U.S. has the right to tax income connected with the rental and sale of U.S. real estate. Given this, it is very possible that owners could be subject to personal income tax in both jurisdictions. However, under the terms of the U.S. Canada tax treaty, Canada would provide a foreign tax credit for U.S. tax paid to avoid double taxation.
U.S. rental activity is reported annually on a U.S. non-resident income tax return. The initial non-resident return will include an application for a U.S. tax identification number (ITIN). The IRS will issue the ITIN which will be used as a tax processing number.
The state where the property is located may also have a personal income tax filing requirement. Any rent collected may be subject to state and local sales tax. Care should be exercised to make sure that these taxes are collected and remitted when required.
Rental Income Deductions
Unsure about allowable expenses that can be claimed against rental income? Examples of common rental expenses may include:
- Property insurance
- Utilities
- Mortgage interest
- Property taxes
- Condominium fees
- Repairs and maintenance
- Management and leasing fees
- Depreciation
Selling U.S. Property
In the year a property is to be sold, the process is essentially the same whether it is a vacation property or a rental investment property. A capital gain will be calculated along with the U.S. rental income in the year of sale. Similar to the reporting of rental activity, the gain on the sale of US real property will be reported to both Canada and the U.S with a foreign tax credit available to reduce the tax on the capital gain in Canada. It is possible that U.S. tax will be withheld from your sale proceeds and credited against your tax owing on the U.S. non-resident return.
Final Notes
We have two final notes from a Canadian tax perspective. You should be aware that U.S. rental properties are considered foreign property for purposes of the annual T1135 reporting requirement. Also, when calculating the capital gain on your Canadian tax return, the cost of the property should be translated into Canadian funds at the time of purchase. This may result in an additional capital gain or loss, depending on the change in the exchange rate during the period of ownership.
Need help? Contact us to discuss your Canadian and U.S. filing requirements. The experienced team of professionals at Ernst and Company CPA are available for personalized assistance.
