Taxes applied to Canadians owning US property and renting out -

QUESTION:

My wife and I would like to purchase a home in Scottsdale and rent it out for investment.
How much will the US Gov tax our rental revenue? Can I deduct expenses like property management and other fees like I do in Canada?
Can you recommend an expert in Calgary, AB I can speak with (or hire)?
Thanks


 
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david ingram replies:

You can deduct all expenses you find on Canadian form T776 or US schedule E

I do not kno wof anyone in Calgary although there must be someone who specializes in US /Canada.  The others I recommend ARE TO BE FOUIND IN THIS OLDER QUESTION AT http://www.centa.com/CEN-TAPEDE/archive/Week-of-Mon-20070716/003455.html

With regard to the rental, the most tax you will be paying to Arizona and the IRS is likley in the 20% range unless you start netting over $50,000 a year.  But it is not double taxation.  Canda will give you credit for taxes paid to the US and Arizona.

This following older question will likley help.


My question is: US-specific

QUESTION: I am considering purchase of a vacation home in Arizona. From a legal and a tax perspective
what do I need to know before proceeding?

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david ingram replies:

First.     Make sure you and all members of your family can actually go to the US.

A couple of times a month, I get a plaintiff call from someone who has been banned from the US or DENIED ENTRY BECAUSE OF A 30 OR 40 YEAR OLD CANADIAN legal problem.   A teen-age assault, a couple of shop lifting charges, a bad cheque, etc.

Even a Young offender's conviction that does NOT show up on the Canadian system can usually be found on the American system.

Absolute and Conditional Discharges that are specifically not a criminal record in Canada count against one at the US border.

Second. pick your property carefully.  If buying a condo, make sure that you read the minutes of every strata meeting for the past two years at least.  Watch out for insect infestations, etc.  If buying a single family dwelling, watch out for the title and always buy title insurance.  Although unlikley, the US system does not guarantee your property is fee and clear, as the Torrens System in Canada does.   Although highly unlikely, an old Spanish Land grant could interfere with your title ten years later. 

Third.   If renting, be aware that you will have to file an Arizona 140NR and a Federal 1040NRwith schedules E and 4562  each.  If you lose money, there is no penalty if you do not file the Arizona tax return, but failure to file the 1040NR can earn a fine of $1,000 to $10,000 plus 30% of the gross rent even if you lost money on the rentals.

Four    The US schedule E figures are than transferred (In Canadian Dollars) to schedule 776 of your Canadian Return.  If you ended up paying tax to teh US or Arizona, the foreign tax paid is put Cdn form 2209 (and maybe 2036) an dthe resulting calculation is a credit on line 431 o fthe Canadian Schedule 1.

Five     When you sell, you will pay tax first to the US and Arizona and then to Canada and claim the foreign tax credit as above.

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Subject:        US Condo and Rental Expenses
Expert:         taxman@centa.com
Date:           Saturday March 03, 2007
Time:           02:22 PM -0500

QUESTION:

We have a rental property in the US.  Can I claim the property taxes paid on my condominium as a rental expense deduction on my Canadian taxes?  Form T776 mentions only Canadian property taxes however, the general guide states that all expenses can be deducted.


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david ingram replies:

Anything that can be claimed on schedule E of the US return can be claimed on form T776

You need to do your Schedule E 1040NR first and then convert the US figures to the T776 on  your Canadian return.  If the condo is in Arizona, you would do a 140NR or if in Califormnia, a 540NR.

There is no state tax in Florida, Texas or Nevada, the other three popular places for a Canadian to have a rental US condo.

The difference between the two countries is the method of claiming depreciation.  In the US, you MUST calculate the depreciation and include it even if it creates a loss.  The good news is that the operating loss caries forward as a future deduction agaisnt rent OR Capital Gains as opposed to non-resident losses in Canada which unfairly disappear into the ether.

In Canada, you do NOT have to claim it and if you do, can only claim enough to create a zero rental. Depreciation or CCA (capital cost allowance) as we call it can NOT be used to create or increase a loss.

Make sure that you do theUS returns, particularly if you are losing money.  The penalty can be a minimum of $1,000 to $10,000 PLUS 30% of the gross rent for failure to file a US rental return by a non-resident.

We, of course, are ideally suited to look after these for you by fax, snail mail, email or courier.
-------------------------------------------------------------------------------------------------

My wife and I are Canadian citizens and own a rental property (house) in Arizona. 
Do I need to file income tax in the USA? Can we deduct the mortgage interest 
and any expenses associated with the rental on our Canadian income tax return?
Thanks and regards,
______________________________________________
david ingram replies

If you do not file a US 1040NR with Schedule E and Arizona 140PY or 140NR return, you face the likely Federal penalties of a $1,000 to $10,000 fine each per year for failure to report rental income as a non-resident plus 30% of the gross rent with no expenses allowed.  

That is for each of you if you both own the property.  And, I  have never seen a $10,000 penalty.

Then, you will EACH be assesed 30% of the gross rent with no expenses allowed.

(Canada's penalty of  just 25% of the gross rent with no expenses in reverse seems mild in comparison.)

FILE the US returns for every year you have missed.

THEN - There is NO responsibility for you to claim any rental expenses on your Canadian return.  You can claim them if you wish on form T776.  HOWEVER, you MUST report the gross rent on line 126 of your T1 if you do not claim expenses and the net rent if you do,.If there is a legitimate rental loss which has not been created by your using the unit personally, you can use the loss to reduce your other taxable income.

A Warning.  There is ample evidence that the IRS and CRA are pro-actively sharing information about these.  And, if you are in a complex and using the unit personally NEVER talk about the fact you have not filed a US tax return and don't ask a local.  I personally know of two people who make their living turning in Canadians who are not filing their US returns.  There is a 10% to 30% reward for turning you in by filing US form 211. See it at www.irs.gov - click on forms, etc.

If you need help with this, you now know where we are.
________________________________________________________
 
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This is not intended to be definitive but in general I am quoting $900 to $2,900 for a dual country tax return.
$900 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only (but were filing both countries) - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
 
$1,100 would be the same with one rental
 
$1,300 would be the same with one business no rental
 
$1,300 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.
 
$1,600 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits  no move in or out

$1,700 would be for two people with income from two countries

$2,900 would be all of the above and you moved in and out of the country.
 
This is just a guideline for US / Canadian returns
 
We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $200.00 up.
 
With a Rental for $400
 
A Business for $400 - Rental and business likely $550 to $700
 
And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.
 
Moving in or out of the country or part year earnings in the US will ALWAYS be $800 and up.
 
TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.
 
8891 forms are generally $50.00 to $100.00 each.
 
18 RRSPs would be $900.00 - (maybe amalgamate a couple)
 
Capital gains *sales)  are likely $50.00 for the first and $20.00 each after that.

Catch - up returns for the US where we use the Canadian return as a guide will be $150 to $500.00 depending upon numbers of bank accounts, RRSP's, existence of rental houses, etc.

Just a guideline not etched in stone.
 
 
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