Foreign Nationals

Tax implications for Canadian investors owning U.S. property

By Milo

March 25, 2024 6 min read

Table of contents
Tax implications for Canadian investors owning U.S. property

Purchasing rental property in the US can be an excellent investment if you're a foreign national. America remains an attractive place to own real estate. However, you need to understand how your US rental income will be taxed. Don't worry, I'll walk you through what you need to know!

First, let's quickly cover what we'll discuss:

  • Depreciating your foreign rental property
  • Reporting rental income to the IRS
  • How US taxes apply to foreign rental income
  • Pro tips for your US taxes
  • Common questions foreign investors have

Now, let's get into the details.

Depreciating your foreign rental property

One tax advantage of rental real estate is depreciation. This lets you deduct a portion of your property's value each year to reduce taxable rental income. As a foreign owner, you may be eligible to claim depreciation on your US properties. Here's how it works:

  • For a residential rental, depreciates over 27.5 years. You can deduct 3.636% of the value annually.
  • For non-residential property, depreciates over 39 years. You can deduct 2.564% of the value each year.

For example, say you purchased a residential rental for $500,000. In year one, your depreciation would be $500,000 x 3.636% = $18,180. This lowers your taxable rental income for the year by $18,180. Not bad! Now, you can only depreciate the building itself, not the land value. And there are limits if you use the property personally sometimes. But overall, a nice deduction to have!

Pro tip: Hire a US tax expert - Milo recommends getting help from a US accountant or attorney experienced in this area. They can guide you on ownership structures, deductions, estimations, audits, and more. Their fees are typically deductible too!

Reporting Rental Income to the IRS

One important element of staying compliant with taxes is accurately reporting rental income and expenses to the IRS every year. This is done with:

  • Schedule E - Filed with your annual personal tax return to calculate net rental income.
  • Form 8858 - For foreign businesses owning US property, including real estate rentals. These forms report your gross rent, expenses like taxes and repairs, mortgage interest, depreciation, and gains/losses when you sell. You must file even if you didn't make a profit! Not reporting can lead to late fees and back taxes down the road. Stay compliant from the start.

How to Report Foreign Rental Income from Real Estate

Foreign rental income needs to be reported accurately. Follow these steps:

  • Report gross rent - Report the total rental income collected without any deductions.
  • Take allowable deductions - Deduct all allowable expenses like property taxes, interest, repairs, depreciation, agent fees, utilities, insurance, and advertising.
  • Report in US dollars - Convert rental income and expenses into US dollars using the appropriate exchange rate for each transaction.
  • File individual or corporate tax returns - Report on Schedule E for individual ownership or appropriate corporate forms for entity ownership. Partnerships and trusts also have specific filing needs.
  • Pay any US taxes owed - Your deductions may cover your rental income to lower or eliminate US taxes owed. But if your net income is high enough after deductions, you need to pay applicable US income taxes.

Does the IRS Tax Foreign Rental Property?

Yes, the IRS taxes foreign rental property owners on US income similarly to American citizens. The United States utilizes a worldwide tax system that taxes foreign persons similarly to US citizens and residents.

Your US rental income is subject to the marginal federal income tax rates of 10-37% based on your total taxable income and filing status. You can take deductions to lower your rental income.

State taxes may also apply in the state where your rental property is located. Typical state tax rates range from 1-13% of income.

Some key facts on how foreign rental income is taxed:

  • Taxed when rents actually or constructively received
  • Must withhold 30% of gross income if a non-US person fails to provide a Taxpayer Identification Number (TIN)
  • Subject to same deductions as US persons - depreciation, property taxes, interest, repairs, etc
  • No tax treaty provisions except rent connected to a US trade or business

Pro tip: Keep Detailed Rental Property Records Be sure to keep thorough documentation on your US rental property's income, expenses, purchases, improvements, leases, and depreciation. Good record keeping validates your tax figures if ever audited and helps optimize deductions. Use apps and accounting software to efficiently track everything.

Common Foreign Investor Questions

Let's quickly run through some FAQs:

Do I need a US Taxpayer ID Number? Yes, you need a TIN like a Social Security Number or ITIN to report income and deductions.

Can my foreign LLC own US property? Yes, but US rental income is still taxable. You'll need to file Form 8858 for entities. Consulting a cross-border tax attorney on structures helps.

Is rental income from my US vacation home taxed? Yes, you need to report it if you rent it out when not using it yourself. Stricter personal use rules apply here.

Do I need US estate tax planning? Potentially - US assets like real estate may incur estate tax without proper planning. Work with an advisor on ownership and trusts.

Can I deduct rental losses against other US income? Generally no due to passive loss limits - losses offset rental income but not other investment income. Unused losses carry forward.

Do I need to make estimated tax payments? Yes, you need to make quarterly payments if expecting to owe $1,000+ in US tax after deductions. Failure to pay can lead to penalties.

Looking for US Rental Property Financing? If you're looking to finance the purchase of US rental property as a foreign investor, Milo is here to help! We specialize in mortgages and lending for global consumers purchasing real estate abroad or generating income from foreign rental properties.

Learn more about how we can help you access the best US property financing options!

Disclaimer The contents of this blog post are provided for informational purposes only and do not constitute tax advice. The information contained herein is not intended to serve as a substitute for professional tax advice or consultation with a qualified tax professional. Always seek the advice of a qualified tax professional before making any decisions or taking any actions related to your taxes or financial affairs.

Sources:

The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.

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