I moved to the US from Canada about 18 months ago and am about to file a 1040 US tax return. I am no longer eligible to be treated as a non resident for US tax purposes, and so must declare my worldwide income (not just US income).
I have a Canadian rental property (my former residence in Canada) and am wondering how it should be handled in my US tax returns. My specific questions are:
- In completing Schedule E, what exchange rate should be used to translate the Canadian rental income, depreciation and expenses to US$?
- How is the depreciation allowance in form 4562 calculated i.e. how is the Basis on line 19h calculated?
- What receipts & other documentation do I need to file with my return to support Schedule E and forms 8582 and 4562?
- If there is a loss on this property, would it qualify as a passive activity loss and is it deductible on the 1040?
Thanks.
Michael
US Taxation of Canadian rental property
Moderator: Mark T Serbinski CA CPA
Since your incomes and expenses are spread throughout the year, you would use the yearly average exchange rate, available at the CRA and bank of canada websites.
You do not send receipts to IRS. You keep them until asked.
Losses can be written off against other income.
I trust you are adhering to all the cdn non-resident tax requirements as well, including the proper MONTHLY withholding and remittance from the rent, and filing section 216 return?
Whatever tax you pay in canada, if any, can then be used on your US return, likely as a deduction in your case, if you are not netting income.
You do not send receipts to IRS. You keep them until asked.
Losses can be written off against other income.
I trust you are adhering to all the cdn non-resident tax requirements as well, including the proper MONTHLY withholding and remittance from the rent, and filing section 216 return?
Whatever tax you pay in canada, if any, can then be used on your US return, likely as a deduction in your case, if you are not netting income.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
The major differences between the US and Cdn treatment of rental income are:
1. In US you MUST depreciate. IN canda you CAN depreciate. If your US depreciation is making your rental income zero, it might be beneficial for you to depreciate in canada to make it zero as well.
2. In US you can write off renatl losses against other income. In canada, you can too, but not if the loss was caused only by depreciation. Of course, as a non-resident, you can't claim a net loss at all for any year, the best you can do is get to ZERO.
3. The US and Canada differ on the basis for depreciation. I don't have that difference at my fingertips right now, but teh schedule and form instructions should be pretty clear (?).
1. In US you MUST depreciate. IN canda you CAN depreciate. If your US depreciation is making your rental income zero, it might be beneficial for you to depreciate in canada to make it zero as well.
2. In US you can write off renatl losses against other income. In canada, you can too, but not if the loss was caused only by depreciation. Of course, as a non-resident, you can't claim a net loss at all for any year, the best you can do is get to ZERO.
3. The US and Canada differ on the basis for depreciation. I don't have that difference at my fingertips right now, but teh schedule and form instructions should be pretty clear (?).
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Thanks for the quick response.
The net income in 2007 (as well as the projected 2008 net income) is zero before allowing for Canadian depreciation, so I have decided to defer using the depreciation in the Canadian 216 return until it is needed, as my understanding is that Canadian tax law allows this. So I will be depreciating the property in my US tax return but not in the Canadian one.
I paid the 25% withholding tax to CRA in 2007 but have made an NR6 application for 2008, which should eliminate the withholding tax altogether. The non resident account used in 2007 was administered by CRA (since I did not have a Canadian agent at that time). I have applied for an NR4 statement for 2007 (in order to make a 216 election for that year), but I have been told by CRA that they normally take 9-10 months to produce these statements. Can you confirm that this is how long it actually takes in practice?
In relation to the US taxation of the property - would the IRS really accept the average exchange rate used by CRA or the Bank of Canada, or would it be better to use a rate published by a US source?
Any other advice you can offer in this situation would be appreciated. At the moment, I am trying to figure out how to allocate the property's value between the land and the building as I understand that only the building can be depreciated in Schedule E.
Thanks.
Michael
The net income in 2007 (as well as the projected 2008 net income) is zero before allowing for Canadian depreciation, so I have decided to defer using the depreciation in the Canadian 216 return until it is needed, as my understanding is that Canadian tax law allows this. So I will be depreciating the property in my US tax return but not in the Canadian one.
I paid the 25% withholding tax to CRA in 2007 but have made an NR6 application for 2008, which should eliminate the withholding tax altogether. The non resident account used in 2007 was administered by CRA (since I did not have a Canadian agent at that time). I have applied for an NR4 statement for 2007 (in order to make a 216 election for that year), but I have been told by CRA that they normally take 9-10 months to produce these statements. Can you confirm that this is how long it actually takes in practice?
In relation to the US taxation of the property - would the IRS really accept the average exchange rate used by CRA or the Bank of Canada, or would it be better to use a rate published by a US source?
Any other advice you can offer in this situation would be appreciated. At the moment, I am trying to figure out how to allocate the property's value between the land and the building as I understand that only the building can be depreciated in Schedule E.
Thanks.
Michael
You can defer Cdn depreciation until you need it, and can pick and choose when and how much (to bring your income to zero).
As to NR4 statement, I would file withhout it, since they administered the withholding. You know what was withheld, use this value. Because you did not file NR6 for 2007, you did not sell in 2007, and you are not using depreciation , you are not subject to the strict filing deadlines of June 2008, but I would be filing as soon as practical to get your money back.
For 2008 and beyond, make sure you file your 216 return on time, since you have submitted an NR6. this will be espaecially true next year when the CRA will still not have prepared the NR4 for the money withheld in the first months of 2008 of this year(before your NR6 is approved).
The IRS is not picky. As long as you are consistent, they don't care. Your expense and your income will have the same exchage rate.
Any US tax accountant can tell you how to figure out Sched E depreciation. This is a common issue, not related to cross-border....
As to NR4 statement, I would file withhout it, since they administered the withholding. You know what was withheld, use this value. Because you did not file NR6 for 2007, you did not sell in 2007, and you are not using depreciation , you are not subject to the strict filing deadlines of June 2008, but I would be filing as soon as practical to get your money back.
For 2008 and beyond, make sure you file your 216 return on time, since you have submitted an NR6. this will be espaecially true next year when the CRA will still not have prepared the NR4 for the money withheld in the first months of 2008 of this year(before your NR6 is approved).
The IRS is not picky. As long as you are consistent, they don't care. Your expense and your income will have the same exchage rate.
Any US tax accountant can tell you how to figure out Sched E depreciation. This is a common issue, not related to cross-border....
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best