Buying a U.S. Property? Keep the IRS Happy with these Simple Tips
Ready for loft living in NYC? Or, maybe a swim in the infinity pool at your condo in sunny California?
If you’ve got your eyes on some property south of the border, there are definitely some things to know before you buy. Purchasing real estate in the U.S. triggers tax implications in both countries, so here’s what you should know about keeping the CRA (Canada Revenue Agency) & the IRS (Internal Revenue Service) happy.
Do I need to file a return for personal property?
If you’re using your U.S. property only for personal use, it comes down to how many days you’re in the country. To figure out if you need to file a return, you should complete a substantial presence test which determines if you need to file one of two documents: an 8840 Closer Connection Statement, or 1040 return.
Should I report the rental income on my U.S. property?
If you’re renting the property, you need to report the income in both Canada and the U.S.
How do I report rental income in the U.S.?
To make sure the IRS is in the know, you’re required to complete a 1040NR every year to report your rental income. Under the U.S. Canada Tax Treaty, rental income in the U.S. is subject to a 30% withholding of the gross rent in the U.S. The good news? You can make a one-time election, which allows you to pay tax on only the profit.
Do I have to report the rental income in Canada, too?
You betcha. Canadian residents have to report their worldwide income on their tax returns, but you can claim a foreign tax credit for any taxes paid in the U.S.
Are there any rental expenses I can claim?
The short answer is “a few”. There are different rules in each country, and your rental statements may not match. Expenses such as mortgage interest, property taxes, utilities, normal maintenance, insurance and accounting fees are all eligible. In Canada, you don’t have to claim the capital cost allowance, but under U.S. law, claiming depreciation is mandatory. Rental property is determined to have a 27.5 year life span, or you can choose a 40 year life span.
Can I do my own renovations?
If you’re handy with a hammer and want to make some upgrades, you have the green light if the property is only for personal use. However, if the property generates rental income, it’s a no-go. It’s important to know that you don’t have the right to operate a business or rental in the U.S., so, you’ll need to hire a property management company to collect rent, look after the property and handle any renos. If you want to do your own renovations, you’ll need the appropriate work visa.
How do I file a return in the U.S.?
Getting your paperwork together starts with applying for an ITIN – Individual Taxpayer Identification Number, which is similar to a Social Security Number. You can apply for the ITIN when you file your first U.S. tax return.
What about capital gains when I sell?
If you’re ready to close the door on your U.S. property, and it’s not your principal residence, you need to report your capital gains in both countries. The U.S. requires the full capital gain be reported on the 1040NR, but they’re generally taxed at a lower rate. Canada only taxes 50% of a capital gain.
What exchange rate do I use?
To make sure your calculations are on point, you need to report your income in Canadian dollars on your Canadian return. You can use the average annual exchange rate, which is determined by the Canada Revenue Agency or Bank of Canada.
Do I need to file state taxes?
This depends on your location. Some states like Arizona and California have state tax, while others like Texas and Nevada don’t. A state tax return is completely separate from the federal return you’d be filing, and any state tax paid can be claimed as a foreign tax credit in Canada.
What does the CRA need to know?
If your U.S. property is a rental, and the cost is more than $100,000, you have to file Form T1135 Foreign Income Verification Statement with the CRA. This form isn’t required if you’re only using the property for personal use.
Owning property in the sunny south does sound appealing to many Canadians, especially during cold winter months. Just be diligent with your tax planning so your dream of owning a U.S. vacation home doesn’t turn into a nightmare.