Tax aspects of rental income in the United States

If you plan to rent your property located in the United States, you must declare the rental income in a US tax return each year. You also need to file an income tax return in the state where the property is located, unless the state does not tax this type of income.

You should also report this income in Canada, but you can claim a foreign tax credit for the tax paid in the United States. In practice, it often happens that the Canadian tax cannot be cancelled due to the calculation rules that are different in the United States. As depreciation is mandatory in the US, it often results in a lower or even zero taxable income in the US statement. In addition, a small profit will often be covered by the basic exemption in the American tax return. Therefore, it is frequently not possible to claim a foreign tax credit.

Eligible expenses for the purpose of calculating net rental income (profit rent) are almost the same as those allowed in Canada, except compulsory amortization. The proportion of eligible expenses will vary depending on whether you were using the property partly for personal purposes or not.

In case of rental loss

If eligible expenses exceed the rental income, there are several rules limiting the rental losses in the United States. Losses from passive activities such as rental income are not permitted, but the loss will generally be carried forward against future rental income by completing the appropriate schedules. These losses will be applied against the capital gain on the disposition of the property if they were not applied in the meantime on rental earnings.

There is also loss-limitation rules concerning the amount risked in the activity. Appropriate schedules must be filed.

Withholding on rental income

Gross rental income is subject to withholding of 30% retained by the agent (the lessee or property manager). These deductions will be applicable as foreign tax credit when filing the canadian income tax return. You can avoid withholding by making a declaration in the income tax return. It must be notified to the withholding agent with the appropriate form.

Linked article : Tax aspects of building ownership in United States

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