5 Things Canadians Need to Know About Buying U.S. Real Estate

Allan Madan is a tax expert and a cross border tax accountant Toronto, Ontario, Canada, amongst other things.Having had sufficient experience as a Cross Border Tax Accountant Toronto, he has compiled the “top 5 things Canadians need to know about buying US real estate.”

If you own US real estate, or are planning on buying US real estate as a Canadian, you ought to go through this write-up.

Tax Payer Identification Number:

According to professional Allan(cross border tax accountant Toronto),the first thing you need to know is that you have to apply for an individual tax payer identification number, and you need this number every time you file your taxes with the IRS. To apply for an individual tax payer identification number, complete ‘form W-7’ which can be found on the IRS website. Attach with form W-7, a notarized copy of your Canadian passport. You can get your passport notarized by the Canadian passport office or by an IRS acceptance agent.

Withholding Tax:

Allan’s (cross border tax accountant Toronto) second important point states that Canadians need to know about withholding tax. The IRS levies withholding tax of 30% of the rents that you collect. For example, if you own a property in the United States and your gross monthly rent is a thousand dollars, then 30% (or $300) must be remitted to the IRS in the form of withholding tax.

That does not seem really fair because it does not take into account any expenses incurred in connection with running the property. So, how do you get around this? This brings us to the third point – net rental election.

Net Rental Election:

According to Allan (cross border tax accountant Toronto), this essentially is a waiver or an exemption from withholding tax. By filing the net rental election, you pay tax on the net rental income earned at graduated tax rates. That means expenses can be deducted in arriving at the net rental income. Expenses include mortgage interest, property taxes, utilities like gas, water & hydro, home insurance, management fees, repairs, depreciation, and so forth.

To apply for the net rental election, complete form ‘W-8ECI’. This form is referred to as ‘foreign persons claim for exemption from withholding on income effectively connected with the conduct of a US trade or business’. You have to file form W-8ECI with your property manager or management company every three years.

1042-S Information Return-

The fourth point surrounds information return ‘1042-S’. This deals with the amount of rent collected and property taxes paid in a year. This information return reports those two items to the IRS every year and is completed by your property manager or management company.

Using a Cross Border Tax Accountant Toronto:

The fifth thing you need to know about buying US real estate as a Canadian is that you must hire a cross border tax accountant. Navigating through these forms and applications is very complex so you want it done properly by a professional accountant.

Additionally, your cross border tax accountant Toronto will prepare your US non-resident rental tax return, form ‘1040-NR’. This tax return reports the amount of net rental income you’ve earned in a year and computes tax at graduated income tax rates. The return is due on June 15th of every year.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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