Living in Canada and Renting out property in the states

srini88 · Post by **srini88** » Sat Jul 25, 2009 8:34 am

I am a Canadian PR and a US H1B visa holder. I currently own a home in Canada, where I live now. I am interested in buying a property in the US and renting it out. I have been informed that my property taxes would be much higher in this case because I am not a resident of the US. I want to understand the tax implications for me - would this be a viable proposition? (fyi - this would a property my wife and I would buy jointly).

Thanks!

nelsona · Post by **nelsona** » Sat Jul 25, 2009 1:59 pm

Property tax is a county and stae matter, and, yes, some areas, like FL, have special allowances for residents that give them a lower property tax than absentee owners (but this is not really based on country of residence, but simply the fact that you do not live there).

So, your property income and expenses would be reported on your 1040NR and Cdn return and tax paid. The tax paid would be used on your CDN return. You would have to depreciate on 1040, but not necessarily on Cdn retrun.

This is not an unusual situation.

srini88 · Post by **srini88** » Sat Jul 25, 2009 6:49 pm

Thanks nelson! My concern is whether this would turn out to be a good rental investment or whether I would barely break even after taxes. Any further information you can give me would be great. Thanks again for your prompt response.

srini88 · Post by **srini88** » Sat Jul 25, 2009 7:47 pm

Also, I wanted to clarify a few things:

1. [quote]You would have to depreciate on 1040, but not necessarily on Cdn retrun. [/quote]
Could you please explain what this means to me? Why can/should I not depreciate on the Canadian return? And why do I [i]have[/i] to depreciate on the US return?

Also, I am in the highest bracket in Canada. Overall, how would this property impact my taxes?

I am looking at homes in the 130-140K range, that can be rented out for $1100 or so that will hopefully cover any mortgage.

Thanks again.

nelsona · Post by **nelsona** » Sun Jul 26, 2009 12:28 pm

1. Just as i said, IRS requirss that rental property owners MUST depreciate there rental property every year. CRA does not reqire this, but one is free to if they wish.

2. You will pay Cdn income tax on profits at the marginal rate, any US tax will be credited at your effective rate.

bruce · Post by **bruce** » Sun Jul 26, 2009 4:21 pm

Maybe this is a dumb question but if you have to depreciate rental property on your 1040 but it's optional on your Cdn return, wouldn't it make sense to depreciate on both? Otherwise, you'd set yourself up where your rental income doesn't match and thus your tax credits probably wouldn't be close to matching. Also, down the road, you could end up with a big capital gain in one country with no offsetting gain (& tax) in the other.

nelsona · Post by **nelsona** » Mon Jul 27, 2009 4:06 am

Sometimes in canada, you can't depreciate, since you cannot depreciate beow zero net income.

But of course you generally want to match your 2 returns.

Keep in mind though that canada only accepts half the cap gains tax you pay in US as a credit, so it may not be a bad idea to be building a lrger cap gains bill in US.

bruce · Post by **bruce** » Mon Jul 27, 2009 6:49 am

"Keep in mind though that canada only accepts half the cap gains tax you pay in US as a credit"

Is this specifically related to real estate or is this because of Canada's current 50% inclusion rate for capital gains?

nelsona · Post by **nelsona** » Mon Jul 27, 2009 7:00 am

The latter. It applies to all cap gains. It's just that for Cdns living in canada, by treaty there are no US cap gains other than real estate. and for Americans living in canada, the US cap gains on anything but real este, doesn't qualify for credit at all.

bruce · Post by **bruce** » Mon Jul 27, 2009 7:18 am

Good point. I forgot that USC's need to re-source the US-sourced non-real estate gains back to their US returns. Can you re-source Cdn tax back to your US return at your full effective Canadian tax rate or does it need to be 50% of the effective Cdn rate? Thanks.

nelsona · Post by **nelsona** » Mon Jul 27, 2009 7:44 am

It is effectively the 50% inclusion rate, since when you sitd own to calculate your various 1116s, you apportion the tax according to US income definitions. $1000 of cap gains will have 1/2 as much Cdn tax apportionned to it tham $1000 of other income.

When you re-source on 1116 most often you will be claiming the US tax against US income, not the Cdn tax, so inclusion rate doesn't matter. You will only re-source sufficient INCOME that you need to reduce the US tax to zero.

Example, you have a $1000 cap gain (on US stocks) for which you pay, say, $200 in canada and $150 in US. You can't get any credit for the $150 in canada, so you re-source the stocks on 1116 and claim ~700 of it to get the $150 back. Total tax $200: $200 in canada, 0 in US.

Same example, but the Cdn tax is only $100. Again, you re-source, but now only sufficient to reduce the US tax to $50. Total liability $150: $100 in canad and $50 in US.