I am planning on purchasing a rental property in the U.S. If I am not a U.S. citizen do I need to file a US tax return?
As a Canadian resident, owning a U.S. rental property, you may be required to file a US income tax return. Similar to Canada, if a non-resident of the US earns rental income on a rental property they are required to report this income to the IRS and remit the appropriate tax holdings if the appropriate elections are not made.
A non-resident of the U.S. who owns U.S rental property has one of the following options:
Remit 30% of the gross rental income to the IRS. The rental agent or tenants must remit this amount to the IRS. Under this option you do not have to file a U.S. income tax return.
Complete form W8-ECI. This form elects to treat the income as effectively connected with a trade or business in the U.S. and allows for the rental income to be taxed on a net income basis. Once completed, the form is given to the rental agent or person renting the property and filed along with your U.S. income tax return.
The net income of the rental property is calculated as the gross rental income less expenses.
If you elect to treat the rental income as effectively connected you will need to apply for a U.S. Individual Taxpayer Identification Number (ITIN) and file a US income return and report the net rental income/loss from the property annually. To apply for an ITIN you will need to complete a W-7.
Also note that State tax filing requirements may also apply and the rental activity must also be reported on your Canadian tax return.
Hope this information was helpful and please don’t hesitate to call us at 250-381-2400 if you have any questions.