Buying US Property: A Tax Guide for Canadians
If you are a Canadian resident intending to buy a residential property in the United States it is important that you are aware of the following tax implications particularly if you intend to rent it for any period of time during the year.
A non-US resident owning a US residential rental property may elect either of the following options:
Option A: Elect to pay a tax equal to 30% of the gross rental revenue.
This option makes little economic sense.
Option B: Elect to have rental income taxed on a net profit basis.
In order to avoid the 30% gross revenue tax on your US property you must file form W8-ECI and provide a copy to the rental manager or person renting your property. The W8-ECI completed by the renter and all tax returns must be filed with the IRS within 16 months of the date the tax return was due.
If you elect to pay tax on a net profit basis you are required to file a US personal or corporate tax return to determine the amount of US tax owed. If you elect this option you will need to apply for a US tax identification number.
The net rental profit on your US real estate is calculated as the gross rental income less ordinary and necessary expenses.
The following is a list of the common expenses that are allowed.
- Auto and travel
- Cleaning and maintenance
- Legal and other professional fees
- Management fees
- Mortgage interest paid to banks
- Other interest
- Depreciation:In the US, residential rental property is depreciated over 27.5 years on a straight-line basis. Unlike Canada, you must take depreciation expense on a US rental property. If you fail to take depreciation on a US rental property the IRS will still deem it to have been taken at the time the property is sold.
If you intend to use a US residential rental property for personal purposes in any tax year you should be aware that this may have tax certain tax implications depending on the amount of time you use the rental property. These tax implications may have relatively little impact for a short vacation but residing in the US for a prolonged period can result in a non-resident being deemed by the IRS to be a US resident and taxed in the US on worldwide earnings. The formula for determining whether or not you are deemed to be a US resident is cumulative and includes time spent in the US over a three-year period.
If you intend to spend any significant amount of time in the US it is important that you contact one of our international tax specialists. Our tax experts can assist you to file the necessary IRS forms to apply for exemption from deemed resident status on the basis that you have a closer connection to Canada.
This article has outlined some of the concerns with US federal regulations that a Canadian resident might face when purchasing a US property. You should be aware that each state has similar or parallel regulations. Unlike Canada, however, the US Government does not act as a tax agent for individual states nor are regulations consistent from state to state. Each state must be dealt with separately according to its own particular regulations.
The greatest problems arise from not knowing or not fully understanding US requirements and regulations. Even innocent mistakes may result in severe tax repercussions. Failure to comply with US tax requirements and deadlines can result in disallowance of expense deductions, monetary penalties, and even criminal prosecution.
If you intend to buy a house or purchase an investment property in the United States let the cross border tax specialists at Aylett Grant guide you through the maize of US regulations and help you establish the necessary records to avoid future tax problems. Our international tax experts can offer immediate guidance on the different federal and state regulations that may effect you and assist you to find qualified realtors, escrow agents, appraisers, property managers, and other professionals in the area you intend to purchase your US residential property.
Our experienced US Canada Tax acountants can also prepare all your ongoing cross border tax filings to ensure that you can enjoy the worry-free ownership your US residential property.
Fore more information on important considerations when planning to purchase US real estate, read our article entitled How to Buy US Property