US Tax Filing for Canadians: Renting or Selling US Real Estate
US Tax Filing for Canadians: Renting or Selling US Real Estate
After the economic downturn and when the Canadian dollar was stronger, many Canadians took advantage of real estate prices in the United States and purchased properties there. Due to US tax residency considerations and US immigration law restrictions, Canadians can generally only spend up to 182 days in a year in the United States (to manage substantial presence test, Canadians would spend fewer than 121 days in any given year), thus limiting a risk of being considered a US tax resident and having immigration issues. As such, many decide to rent out their properties or vacation homes to US residents or nonresident alien individuals. Others opt to, or consider selling their real estate properties with the substantial decline of the Canadian dollar. In 2016, many Canadians sold their US real properties to recognize substantial gains, partially due to the Canadian / US dollar favorable exchange rate.
Without proper tax planning, the decision to sell US real estate may result in some unexpected tax consequences. Keep reading to learn about the requirements for Canadians who sell their US real estate, and for those who rent out their property.
When renting out or selling your property in the United States, you may be subject to US tax and/or US tax filing requirements. To file a US tax return, you must apply for a US Individual Taxpayer Identification Number (ITIN), by filling out Form W-7, Application for Individual Taxpayer Identification Number (ITIN) and filing it with the Internal Revenue Service (IRS), if you do not already have ITIN, do not have a US Social Security Number (SSN) (or otherwise qualify to apply for an SSN), or if you have not already applied for one. Note that if you do have an ITIN, you may need to renew it.
Canadians Selling US Real Property – FIRPTA Withholding and US tax filing requirements
Canadian residents who own and sell real estate property in the United States are generally subject to a 15 percent withholding tax of the gross selling price under the Foreign Investment in Real Property Tax Act (FIRPTA). The tax that is withheld can be offset against the US income tax payable on any gain realized on the sale, and refunded if it exceeds the taxpayer’s ultimate tax liability. Naturally, to get a refund, you are required to file a US tax return for the year of the real property disposition. You may be able to eliminate or reduce FIRPTA withholding if, for example.
- The property is sold for USD $300,000 or less to a purchaser who intends to use the property as her/his residence. In that case, no FIRPTA withholding is due. However, if you realized any gain on the sale, a US tax return must still be filed as the gain on the sale may still be taxable in the United States.
- The property is sold for USD $1,000,000 or less to a purchaser who intends to use the property as her/his residence. In that case, a reduced 10 percent FIRPTA withholding applies. However, if you realized any gain on the sale, a US tax return must still be filed as the gain on the sale may still be taxable in the United States.
- Prior to the closing date, the Canadian owner applies and obtains an IRS withholding certificate on the basis that the expected US tax liability would be less than 15 percent of the sale proceeds. The application for an IRS withholding certificate is typically made on Form 8288-B and FIRPTA withholding may be reduced or eliminated based on a number of applicable factors.
If a withholding certificate is issued only after the transfer, this may allow the seller to receive an early refund. Generally, the IRS issues a withholding certificate within 90 days from the date of Form 8288 submission (note that to expedite the IRS review, you should include all applicable documents in support of the reduced or zero FIRPTA withholding claim). In order to claim exemption from withholding, you must have a valid Taxpayer Identification Number (TIN) (ITIN or SSN).
If there was a gain or a loss on the sale of the US real property, Canadians are required to report it on their US tax return, Form 1040-NR. As a Canadian resident, you will also have to report the transaction in Canada.
If there is a gain on the sale in both Canada and the United States, the United States has the first right to tax the profit and the US income tax can be claimed as a credit against any Canadian and provincial tax on the sale. Foreign exchange gain or loss may also be realized.
State income tax may also apply on the sale, depending on the state where the real estate is located. Filing a state income tax return may also be required, again, depending on the applicable state requirement where the property is located. Finally, some states, such as California, have a process for claiming a reduced or zero withholding, similar to the IRS Withholding Certificate process described above.
Filing Deadlines and Penalties for Canadians Selling US Real Property
Do I Need to File US Income Tax return if I Rent out my US Real Property or Vacation Home?
The short answer, Yes. Canadian individuals who rent out their US real property for 15 days or more may have to file a US income tax return to report the rental activity and income generated.
If you are a Canadian citizen and resident who owns a residential rental property in the United States, you are subject to US income tax on rental income you receive from your US real property, or potentially, the value of the property. Canadian taxpayers who do not follow this requirement may be subject to significant income tax liabilities and consequences where proper procedures are not followed.
US Filing Requirements for Canadians With Rental Income
As a US nonresident property owner, you’re typically required to pay a 30 percent withholding tax on the gross amount of rent received. Although not required, the nonresident can engage with a US agent who collects the rent and remits the withholding tax to the IRS on their behalf. If proper withholding is made, the nonresident should generally have no further tax filing requirements.
To benefit from applicable deductions and to claim rental expenses, the nonresident owner can make a “net rental election.” Making the net rental election is usually more beneficial than having a 30 percent withholding on a gross basis. You need to provide the US withholding agent with a properly completed IRS Form W-8ECI, Certificate of Foreign Person’s Claim That Income is Effectively Connected with the Conduct of a Trade or Business in the United States.
You only have to make the election once. The statement will stay valid for as long as you own the property if you file your 1040-NR on time.
Filing Deadlines and Penalties for Canadians Claiming US Rental Income
For the 2016 tax year, Form 1040-NR must be filed by June 15th. However, if you earned any reportable wages in the United States during the 2016 tax year, you must file your US tax return by April 18, 2017. The tax, if any is owed, must be also paid by the applicable filing due date. You can extend your filing deadline by six months by filing Form 4868. Form 4868 must be filed by the tax return filing due date. If you do not file your return by the due date, you may have to pay a failure-to-file penalty and interest. The penalty is based on the tax not paid by the due date.
Unlike Canadian tax rules, depreciation is a mandatory deduction in the United States. If you don’t file a return, you are still deemed to have claimed depreciation and could be subject to depreciation recapture.
Note: A Canadian resident is an individual who is considered as a Canadian resident for Income Tax purposes and is liable to pay his income tax in Canada. If you are a US citizen, US tax resident, or a Green card holder living in Canada, the comments in this note do not apply to you.