5 Things Canadians Need to Know About Buying U.S. Real Estate
Allan Madan, CA
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.
Disclaimer
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.
ABOUT THE AUTHOR
ALLAN MADAN
CA.CPA.CGA
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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We like to make sure that all information is as direct and concise as possible.
Thank you !
The Team at Madan CA
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Thank you !
I bought a US property using a LLC. I want to transfer ownership of the property to a LLLP. What should I do?
Thanks you.
Hi Rona,
Thank you for your question. What you would need to do is to convert the LLC into a LLLP. This is a complex procedure and it depends on which state you’ve established your LLC. The exact process depends on your circumstances. Therefore, you should definitely consult a tax professional to discuss in more detail.
Please do not hesitate to contact me.
– Allan
(905) 268-0150
Do you do streamline procedure tax filings for us residents living in Canada?
Hi Caron,
Americans living outside of Canada who are behind in filing their US tax returns can catch-up with their tax filings through the “Streamlined Process.” To qualify for the streamlined process, you must meet the following criteria:
1) You are low compliance risk (this means that your tax situation is not complicated)
2) You have lived outside of the United States since January 1, 2009
3) You ave not filed a US tax return since January 1, 2009
Pursuant to the Streamlined Process, you must file the following returns:
a) US personal tax returns for the previous 3 years, plus the current year
b) Report of Foreign Bank & Financial Accounts for the previous 6 years, plus the current year
Please contact me if you would like to discuss this matter further.
Thanks,
Allan Madan, CPA, CA & Team
Excellent information. I do have one question .
Proposed structure is LLLP in US, General partner in LLLP is a Canadian Corp. LLLP Partners s are 2 investors in Canada. Rental income will be issued directly to LLLP partners. So.. If the startup capital is from a Home equity LOC, can the interest on the HELOC be deducted from personal income tax ( of Limited Partners) as it would for a Canadian investment ? Of course we’d like to save taxes and offset any borrowing costs anyway we can … wouldn’t everyone 🙂
Thanks