Many Canadians dream about owning a property in the US for retirement or investment purposes or simply to escape winter. Regardless of the reason for owning US property, Canadians need to be aware of the rules and tax issues they are subject to when renting or selling such property.
If Canadians rent their US real estate for 15 days or more, they may have to file a US income tax return to report their rental activity. Rental income paid to Canadians is subject to a 30% US federal withholding tax. This amount is applied to gross rental income, which means it is applied before deducting any expenses related to that rental income. If the withholding amount is remitted to the IRS, a homeowner should not have any more IRS tax filing requirements with respect to US rental income.
However, taxpayers can elect to not be subjected to this 30% withholding tax obligation. If expenses are high, the IRS will allow a non-US resident homeowner to make a net rental election on Form 1040NR, the US income tax return for non-resident aliens. The election subjects a taxpayer to graduated rates rather than the flat 30%.
Note that tax paid in the US may also be eligible for a foreign tax credit from Canada.
Homeowners do need to keep in mind that some states collect sales tax on rental property and therefore require that a state-level tax return be filed.
When Canadians sell their US real estate, they are required to file a US income tax return (Form 1040NR) to report any gains or losses on the sale and must pay US capital gains tax on any profit.
Since February 18, 2016, Canadians have been subject to a 15% withholding tax on the gross sales price of U.S. real estate. However, if the sales price is under US$300,000, withholding tax does not apply when the purchaser or one of his family members states that for the next two years following the sale, they will occupy the residence for personal use 50% of the time that the property will be in use.
If the above exception is not applicable and US income tax on the gain will be less than 15%, Canadians can apply for a withholding certificate from the IRS. A withholding certificate enables Canadians to pay only the actual income tax owed on the transaction.
To get this certificate, taxpayers need to complete Form 8288-B and send it to the IRS before the sale to prove that the income tax owing will be less than 15%. The IRS will typically issue a withholding certificate within 90 days of receipt of the application.
Note that all withholding tax applied at the time of the sale will be credited on the US income tax return when it is filed subsequent to the sale. (US federal income tax must be filed by the seller before June 15 of the year following the sale.)
Once again, state income tax should be considered since dispositions of real property are taxed in some US states.
Since Canadians may be subject to US tax on rental and sales income from US property, ignoring US laws and regulations can result in significant income tax liabilities and penalties. It is thus very important that Canadians follow the right procedures when dealing with US real estate.
If you have any questions about your US tax liability as a Canadian owner of US real estate, please contact us.
MCA Cross Border Advisors, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.