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Do you own rental property in the US?

March 18, 2013 at 10:19 AM

The following comments primarily relate to the ownership of U.S. rental property by Canadians.  They may not apply to individuals such as U.S. citizens, U.S. residents, and Green Card holders.

U.S. Withholding and Filing Responsibilities

                        The IRS has posted an online article entitled “Foreign Persons Receiving Income from U.S. Real Property”.  According to this release, taxation depends on whether earnings are considered investment income having tax withheld at 30% of gross earnings, or “effectively connected with a U.S. trade or business” and taxed on a net income basis. A foreign owner can elect to have the income treated as “effectively connected” by submitting a properly completed Form W-8ECI.

With regards to the filing of income tax returns, a non-resident failing to submit a timely filed income tax return may lose the ability to claim deductions against the rental income.

State filing and tax payment may also be required.

Editors’ Comment

It may be worthwhile to file tax returns even if a loss is experienced so as to capture the losses for later use when net incomes become positive or when a profit is realized on the sale of the property.

Sale of Real Estate

The United States imposes taxes on profits on the sale of U.S. real estate by a Canadian under the Foreign Investment in Real Property Tax Act.  To enforce collection, a 10% withholding tax is paid to the IRS by the purchaser (or escrow agent as applicable).  A Canadian person may be exempt from the 10% withholding tax if the selling price is less than $300,000 and the buyer intends to use the property as a “residence”. The buyer must sign an affidavit to this effect.  Alternatively, the vendor can apply to the IRS for a reduction in the withholding tax to the maximum possible U.S. tax.  The application for a waiver of the withholding tax must be sent to the IRS prior to the closing of the sale.

Editors’ Comment

If the seller does not have an Individual Taxpayer Identification Number (ITIN), he or she may apply for one with the waiver application.  On a practical side, some escrow agents administering the sale will not wait for the ITINto be processed and simply remit the withholding to

the IRS.  If possible, it is recommended to get the ITIN prior to the sale to avoid this issue.

If the withholdings are sent to the IRS, the seller may file a U.S. tax return at the beginning of the next year to recuperate any withholdings paid in excess of what the actual tax on the sale would be.

Also note that some states have a withholding tax on the selling price of real property (such as California).

Tax Tips & Traps 2013