Part 1: How to Prepare a 1040-NR Tax Return for U.S. Rental Properties

Are you a Canadian investor in US real estate? If yes, then this video is meant for you. I will show you how to prepare a 1040-NR Tax Return for your US rental property. This video is part one of a two-part series. In part 1, I will cover form 1040-NR and in part 2 I will review schedule E and form 4562.

Let’s look at the example of Mr. Justin Trupou, a Canadian resident who lives in Ottawa, Ontario. He is married to a Canadian, with one dependent child who is 17 years old. He is the sole owner of a rental property in Orlando, Florida.

Step 1 – Complete the Identification Area of form 1040-NR
Enter your:

• First Name
• Last Name
• Identifying Number
• This is an Individual Tax Identification Number issued by the IRS. If you do not have one, attach form W7 to the 1040-NR return.
• Address information
• Check the corresponding box if it is an individual, estate or trust.

Step 2 – Complete your Filing Status

• If you are married, and live in Canada or Mexico, check box 3. Otherwise, check box 1 for Single resident of Canada or Mexico.
• If married enter your spouse’s first name and last name and Individual Tax Identification Number. If your spouse does not have an ITIN, attach form W7 to your 1040-NR return.

Step 3 – Claim Exemptions

• Enter the number of exemptions you are claiming. You can claim an exemption for yourself, your spouse , and your dependents in the amount of $4,050 each. Each person that you are claiming an exemption for must have an ITIN. Otherwise, you cannot claim them.
• Enter your dependent’s information.

Step 4 – Report Rental Profit

Report the net profit after depreciation from your US rental property on line 18. Assume that Justin Trupou earned a net profit of $28,200. This amount comes from schedule E, which I will show you how to prepare in part 2 of this video series.

Step 5 – Calculate the Tax and Credits

• Since Justin is claiming exemptions for 3 individuals, including himself, his total exemption amount is $12,150 (i.e. $4,050 x 3), which is entered on line 40.
• Calculate the taxable income, which is the equal to the net rental profit of $28,200 less the exemptions claimed for $12,150. This comes to $16,050 of taxable income, which is entered on line 41.
• Calculate the amount of tax payable on line 42. This should be generated automatically by your tax preparation software.

Step 6 – Enter Payments Made

If you made tax installment payments to the IRS during the year, enter the amount paid on line 63. Let’s assume Justin paid $1,000.

Step 7 – Determine Amount Payable or Refundable

Justin owes tax of $948, which is reported on line 75. The tax owing is equal to the difference between the tax payable (line 42) and the installments paid in the year (line 63).

• Tax Payable $1,948 (Line 42)
• Less: Installments $1,000 (Line 63)
• Amount You Owe $948 (Line 75)

Step 8 – Complete Page 5, Other Information
Lastly, complete page 5 of the form. Please watch while I fill out this information for Justin Trupou.

Please click here to visit part 2.

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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