Olivier Custeau, Fiscaliste, B.A.A., M. Fisc., EA

Rental income in the United States: your tax obligations

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Usually, when a nonresident of the United States (nonresident alien) owns rental property in the United States, tax obligations arise. This is because unlike a US citizen, only your US source rental income is subject to US tax if you are a non-resident of the United States.

Under US Internal Revenue Code, a 30% withholding tax generally applies to rental income paid to non-residents (with exceptions), which may be reduced by applicable tax treaties. In addition, if you later dispose of this property, you will need to notify the US tax authorities.

US tax compliance

There is, however, a method to prevent the 30% withholding from being applied to your rental income. This consists of preparing a US federal income tax return as a non-resident and declaring only your net rental income according to the federal tax schedules.

By doing so, you will be able to deduct expenses related to your rental property (mortgage interest, property taxes, accounting fees, etc.). On the other hand, if your rental income comes from a US state that collects income tax, a tax return from that state will also be required.

To do this, you will first need to apply for an IRS Individual Taxpayer Identification Number (ITIN) so that you are assigned a tax number. Typically, a W8-ECI form will also need to be completed in order to request that no withholding tax apply. The latter is used to confirm to your payer (here, your tenant) that your rental income corresponds to income effectively connected (effectively connected income) to a US activity and that it will be declared on a US tax report.

Please note that your US rental income will also be taxable on your Canadian tax return – as a resident of Canada – and a foreign tax credit will be allowable.

To find out more, don’t hesitate to make an appointment with one of our tax experts. We will be happy to assist you in the preparation of your US income tax return and to properly claim the eligible foreign tax credit on your Canadian income tax return.