Buying real estate in another country is common among people who want to have a ready-made vacation home or a property they can rent out for extra income. Because Canada and the United States are geographically close, many Canadians purchase U.S. properties with this intention. However, there are important tax implications for a Canadian buying U.S. property. Here’s what you need to know to stay in compliance with applicable tax laws.
Reporting Rental Income
Canadians who own U.S. rental property have two options when reporting rental income for tax purposes. Property owners can either pay a 30% tax on gross revenue or be taxed — potentially at a lower rate — on the net profits. While the second option is clearly more attractive, it does mean that landlords need to deduct expenses. Eligible expenses include:
- Depreciation
- Repairs and maintenance
- Landlord expenses, such as travel, mileage, advertising, commissions or property management fees
- Property insurance
- Legal and professional fees
- Mortgage interest
- Real estate taxes
- Supplies
In order to qualify for the net profit taxation, Canadian property owners must complete a form known as form W-8ECI. Additionally, they should provide their lessee with a copy of the completed paperwork. Property owners must also file federal taxes in the U.S. using form 1040NR — a document for non-residents who earned money in the U.S. — and the respective state income tax form.
Rental Insurance and Liability
It is strongly recommended that Canadian property owners purchase homeowners’ insurance to protects their U.S. home. They should also consider obtaining liability and rental insurance. Often, insurance providers will extend a discount when policies are bundled together, so it could save you money to acquire all rental-related policies from the same company.
However, be aware that homeowners’ policies do not always cover use of the home as a rental and may not provide sufficient protection should there be an incident onsite. This is why rental and liability insurance might be a good idea. Rental insurance covers the usage of the house as a rental property, while liability insurance handles fees associated with personal injury, litigation and other matters.
Reporting the Sale of a U.S. Rental
Now that you understand the implications of buying property in the U.S. as a Canadian, what about selling the home?
Selling is usually straightforward. In most cases, Canadian property owners will pay a withholding tax of 10-15% of the gross sales price. The 10% rate applies to properties sold for $300,001 to $999,999. Properties sold for over $1 million are taxed at the higher rate. The withholding is then compared to any tax liability on the sale of the home (essentially, the net profit), and excess withholding will be refunded.
When properties are sold for under $300,000 to someone who will occupy the residence (a homeowner rather than a property investor), there is no withholding. However, the transaction is still taxable. Canadians must report a gain or loss on the sale using tax form 1040NR.
Canadians who believe their tax liability will fall below the 10-15% threshold can apply for a reduction in their withholding before the sale using a special withholding certificate from the IRS. This requires completing Form 8288-B. Since it can take up to 90 days for the IRS to issue the withholding certificate, property owners are encouraged to apply well in advance.
Get Help From a Tax Professional
The regulations for international property ownership can be confusing. A Canadian owning rental property in the USA should consider working with a U.S. tax professional who understands the requirements. If the regulations are not followed correctly, the consequences could include back-due taxes, monetary penalties and even criminal prosecution.
Expat CPA is proud to work with U.S. expats and international residents who own property in the U.S., providing counsel, tax preparation and individual consulting services. Contact us today to discuss your concerns and learn how we can help.