I recently purchased a property in Arizona. I am renting the property, but plan to use it as my winter home when I retire.
My question is whether or not I have to file anything with the IRS?
This is a common scenario for many Canadians over the last few years. With the strong Canadian dollar and the lower prices of real estate in some U.S. cities, many Canadians are taking advantage of this and purchasing an investment/rental property.
Since you are earning income from U.S. real estate you are subject to U.S. income tax on that income. Similar to Canada, the U.S. provides two options for non-U.S. persons to report and pay the required income tax on the income.
The first option is to pay 30% of your gross rental income to the U.S. The withholding agent is required to remit this amount to the U.S. and provide you with Form 1042S. Form 1042S details the gross rental income you received as well as the total non-resident tax withheld.
Under this option, you are not able to deduct any expenses related to the rental property (i.e. mortgage interest, property taxes, utilities, etc.).
The second option is a little more complicated at the beginning, but allows you to report your net rental income/loss to the U.S. Generally, under this option the income taxes that you pay to U.S. are significantly reduced because you are able to deduct all the allowable rental expenses from the rental income.
In order to use this option you must elect to file a U.S. non-resident income tax return (Form 1040NR). Under this option, you will need to obtain an IRS individual taxpayer identification number (ITIN) and submit Form W-8ECI to your U.S. withholding agent or tenant.
If you choose option #2 then you will have to file the U.S. non-resident income tax return (Form 1040NR) by June 15th of the following year and pay any taxes owing by April 15th of the following year.
It is important to note that no matter which option you choose, you will need to report the rental income/loss on your Canadian tax return. In most cases, you will be able to use any taxes paid to the U.S. on the rental property as a foreign tax credit on your Canadian tax return which alleviate any double taxation.
If you require any further assistance, please contact one of our experienced professionals.
Rob Brown, CA