1040 NR Exemption Question

bhattu1974 · Post by **bhattu1974** » Mon May 14, 2012 3:16 am

Hello,

My wife and I own a rental property in USA (in Texas). We are Canadian citizens and reside in Alberta, Canada. We do have a property manager in Texas who manages the rental property for us.

As I understand every year both of us have to file separate 1040NR returns to report the rental income every year and check filing status as 3 (Married resident of Canada or Mexico or married U.S. national).

My question is regarding Exemptions and I am not sure if we are doing the right thing for past several years.

We have two daughters aged 10 and 7. Since both my wife and I have to file separate 1040NR returns, who do we claim as a dependent? As I understand both of us can't claim the same child as a dependent on our returns. Is my understanding correct? For past several years, I claim 1 daughter as a dependent and take an exemption for her, while my wife claims the other daughter and claims an exemption for her while we split our rental income in half. Is this the right way to file? Or, should both of us claim both daughters as dependents?

We all live together, so none of the publications (501, 519, etc.) help us in deciding the right thing to do as all the publications seem to discuss situations in which the parents don't live together and their are judicial issues or one parent earns more income then the other parent, etc. None of the instructions help a 1040NR case in which we aren't allowed to file jointly and hence are forced to file a separate return. How do we really claim our dependents? Any help is appreciated. Thanks in advance.

nelsona · Post by **nelsona** » Mon May 14, 2012 6:21 am

Either of you can claim either child, or both. As long as each child appears on one return.

If one of you is not working in canada, it would probably be best to have that person claim both kids, to lower any US tax below their Cdn tax.

Each person can only cliam their own US tax as a credit on their own Cdn return.

bhattu1974 · Post by **bhattu1974** » Mon May 14, 2012 1:32 pm

Thanks for the reply nelsona. I am glad that I was doing the right thing all along. One more question: Is it okay to keep changing the dependents on different years, for example, Year 1 I claim both daughters as dependents while my wife doesnt claim any, and Year 2 both of us claim 1 daughter each as a dependent, while in Year 3 my wife claims both daughters as a dependent while I don't?

I am asking this because we have multiple jobs as well as are self-employed in Canada and hence sometimes she is the lower earner in the household and some years it's me who is the lower earner. So, depending on that we could use our exemptions so that it affects our Canadian taxes. Over the past several years, we have just split the exemptions and I claim 1 daughter and she claims the other daughter in her tax return.

nelsona · Post by **nelsona** » Mon May 14, 2012 2:28 pm

Thta was my point. But don't worry too much about this. Since you are depreciating in US, I'm quite sure the US taxrate you are paying on your renatl income is minimal. As long as it is below your respective effective tax rates in canada, you will 'use up' all the US tax regardless of how you split it.

bhattu1974 · Post by **bhattu1974** » Wed May 16, 2012 2:41 pm

Thanks Nelson. Regarding depreciation, I was under the impression that it's optional just like it's in Canada. So, till now I haven't depreciated the building cost at all. Now that you mentioned and I read about it I realize that I was doing this incorrectly, it's optional only in Canada but in USA I have to depreciate.

Rather than correcting/amending all of my returns since 2005, would it be alright if I start depreciating from this year onwards (for 2011 return)?

The income was never enough to go above $3000 for either of us so it has always resulted in zero tax in USA till now (and will be the same case this year as well), and hence I didn't depreciate thinking that depreciating will not help me as the taxes are zero anyways. What's the right way to correct this situation.

JGCA · Post by **JGCA** » Wed May 16, 2012 6:39 pm

No you have to file 1040 X NR amendments since you were suppose to claim depreciation and you will be forced to recapture it upon sale, on the CND side da as you wish.

nelsona · Post by **nelsona** » Thu May 17, 2012 1:34 am

As bhattu concludes howevr, if his correction of failure to report depeciation doesn't alter his US tax, there is no point amendingh the older returns. he should simply calculate the yearly depreciation "privately" and be sure that when the time comes to seel, all the prpoer depreciation is recaptures, whether or not it had been correctly reported in the past.

bhattu1974 · Post by **bhattu1974** » Thu May 17, 2012 2:23 pm

Thank you Nelson and JGCA. I will calculate the depreciation privately for all the previous years. However, I do have one question.

I bought the property in October 2002. It was a principal residence. In Feb 2005 all of us immigrated to Canada. In May 2005 we started renting it out. Since 2005 we have been filing 1040NR. Since it was a change of use from principal residence to a rental property in 2005, to calculate the depreciation privately, do I use the value of the building as of 2005 property assessment, or do I have to use the cost as of 2002 when I first bought the property. I believe I shall use the city's assessment for 2005 for my calculations. But, just wanted to confirm. Thanks.

nelsona · Post by **nelsona** » Fri May 18, 2012 7:01 am

I would use the 2005 value. Unfortunately, you will pay US cap gains on the entire gain in any event.