Hi - I'm an American married to a Canadian, living in Canada. We jointly own a rental house in the US that shows a loss. I have US income from SS and IRA, and none from Canada.My wife's only US income is from Social Security. She also has Canadian pension income.
I plan to file her US taxes on 1040NR since she is a NRA as best as I can determine. My taxes will be on 1040 Married filing separately.
My question is how do I apportion the information for the rental property on each of our returns? Do I figure it all out, including depreciation, and then divide all figures by two for each of the returns? Or some other way?
Thank you very much for any help you can offer.
Best Regards,
Rod
Rental Property Reporting
Moderator: Mark T Serbinski CA CPA
Since you are losing in US (and using mandatory depreciation), it would probably be wise for you to alos depreciate in Canada, so as to not create teh situation where you are taxed in canada but not US on this property, since this gets you no tax 'meshing'.
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
It sounds like you've determined or assumed that you each hold half the property as individual owners and not as a deemed partnership. How did you reach that conclusion and rule out that you're not a partnership? Are you filing Form UTP (uncertain tax positions) to report such conclusion?
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Joint undertakings give rise to entities for federal tax purposes if the participants carry on a trade, business, financial operation, or venture and divide the profits.
The following "out" that two USC spouses who are operating a true business (and not just mere joint ownership of property) have for not defaulting to ptshp formation doesn't appear to be applicable to a NRA spouse. As well, positioning that all the NRA has is mere joint ownership of property versus a US business, does not appear viable, as explained below.
A USC husband and USC wife (your wife is NRA) with a US property rental can elect on their joint return (also no joint return for NRA) for it be treated as a JV and not ptshp [http://www.irs.gov/Businesses/Small-Bus ... Businesses]. Sch E instructions state: If you and your spouse each materially participate as the only members of a jointly owned and operated rental real estate business and you file a joint return for the tax year, you can elect to be treated as a qualified joint venture instead of a partnership. This election, in most cases, will not increase the total tax owed on the joint return. By making the election, you will not be required to file Form 1065 for any year the election is in effect and will instead report the income and deductions directly on your joint return. Mere joint ownership of property that is not a trade or business does not qualify for the election.
US Treasury Reg Section 301.7701-1(a)(2) which states "mere co-ownership of property that is maintained, kept in repair, and rented or leased does not constitute a separate entity for federal tax purposes."[full text: Certain joint undertakings give rise to entities for federal tax purposes. A joint venture or other contractual arrangement may create a separate entity for federal tax purposes if the participants carry on a trade, business, financial operation, or venture and divide the profits therefrom. For example, a separate entity exists for federal tax purposes if co-owners of an apartment building lease space and in addition provide services to the occupants either directly or through an agent. Nevertheless, a joint undertaking merely to share expenses does not create a separate entity for federal tax purposes. For example, if two or more persons jointly construct a ditch merely to drain surface water from their properties, they have not created a separate entity for federal tax purposes. Similarly, mere co-ownership of property that is maintained, kept in repair, and rented or leased does not constitute a separate entity for federal tax purposes. For example, if an individual owner, or tenants in common, of farm property lease it to a farmer for a cash rental or a share of the crops, they do not necessarily create a separate entity for federal tax purposes.]
Your wife is an a NRA US property owner who files a tax return and elects to Treat Real Property Income as Income Connected with United States Business and thereby claims to have a US business. How then could she claim in same breath and on same that your joint rental activity does not rise to the level of a business and thus isn't a partnership!? Don't these two positions contradict one another since one must say there is a US business/ECI and the other must say that there isn't (and can't say there is a business but elect out as would 2 USC spouses on a jointly filed 1040)?
Do you think that the Trade Or Business threshold be different for the two different purposes of: (i) no partnership existing & (ii) reasonable basis to file 1040NR with rental property election?
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Joint undertakings give rise to entities for federal tax purposes if the participants carry on a trade, business, financial operation, or venture and divide the profits.
The following "out" that two USC spouses who are operating a true business (and not just mere joint ownership of property) have for not defaulting to ptshp formation doesn't appear to be applicable to a NRA spouse. As well, positioning that all the NRA has is mere joint ownership of property versus a US business, does not appear viable, as explained below.
A USC husband and USC wife (your wife is NRA) with a US property rental can elect on their joint return (also no joint return for NRA) for it be treated as a JV and not ptshp [http://www.irs.gov/Businesses/Small-Bus ... Businesses]. Sch E instructions state: If you and your spouse each materially participate as the only members of a jointly owned and operated rental real estate business and you file a joint return for the tax year, you can elect to be treated as a qualified joint venture instead of a partnership. This election, in most cases, will not increase the total tax owed on the joint return. By making the election, you will not be required to file Form 1065 for any year the election is in effect and will instead report the income and deductions directly on your joint return. Mere joint ownership of property that is not a trade or business does not qualify for the election.
US Treasury Reg Section 301.7701-1(a)(2) which states "mere co-ownership of property that is maintained, kept in repair, and rented or leased does not constitute a separate entity for federal tax purposes."[full text: Certain joint undertakings give rise to entities for federal tax purposes. A joint venture or other contractual arrangement may create a separate entity for federal tax purposes if the participants carry on a trade, business, financial operation, or venture and divide the profits therefrom. For example, a separate entity exists for federal tax purposes if co-owners of an apartment building lease space and in addition provide services to the occupants either directly or through an agent. Nevertheless, a joint undertaking merely to share expenses does not create a separate entity for federal tax purposes. For example, if two or more persons jointly construct a ditch merely to drain surface water from their properties, they have not created a separate entity for federal tax purposes. Similarly, mere co-ownership of property that is maintained, kept in repair, and rented or leased does not constitute a separate entity for federal tax purposes. For example, if an individual owner, or tenants in common, of farm property lease it to a farmer for a cash rental or a share of the crops, they do not necessarily create a separate entity for federal tax purposes.]
Your wife is an a NRA US property owner who files a tax return and elects to Treat Real Property Income as Income Connected with United States Business and thereby claims to have a US business. How then could she claim in same breath and on same that your joint rental activity does not rise to the level of a business and thus isn't a partnership!? Don't these two positions contradict one another since one must say there is a US business/ECI and the other must say that there isn't (and can't say there is a business but elect out as would 2 USC spouses on a jointly filed 1040)?
Do you think that the Trade Or Business threshold be different for the two different purposes of: (i) no partnership existing & (ii) reasonable basis to file 1040NR with rental property election?
Wow, now I'm really confused. Perhaps I should have originally given you more background, but I didn't want to burden you with reading a lot of information.
For the past few years we have been filing jointly as Married. We had more income last year, mostly due to increased IRA withdrawals. Our US tax bite has gone up by over $4,000 and I have been exploring ways to lower it. It seemed to me that it might be lower filing separately since I didn't think I would have to report my wife's Canadian pension income. I thought I should use 1040NR for her.
But doing this has apparently now gotten very complicated and confusing and I am not at all sure how to proceed.
Thank you so much for the responses and help.
Best Regards,
Rod Mell
For the past few years we have been filing jointly as Married. We had more income last year, mostly due to increased IRA withdrawals. Our US tax bite has gone up by over $4,000 and I have been exploring ways to lower it. It seemed to me that it might be lower filing separately since I didn't think I would have to report my wife's Canadian pension income. I thought I should use 1040NR for her.
But doing this has apparently now gotten very complicated and confusing and I am not at all sure how to proceed.
Thank you so much for the responses and help.
Best Regards,
Rod Mell
ND, not sure where yo uare going with this.
The IRS allowing one to elect to treat rental income does not imply that it is business. otherwise they would not have to elect this -- it WOULD be business.
Half the rent an expenses are the responsibility of each taxpayer. No point getting any more complicated than that.
The IRS allowing one to elect to treat rental income does not imply that it is business. otherwise they would not have to elect this -- it WOULD be business.
Half the rent an expenses are the responsibility of each taxpayer. No point getting any more complicated than that.
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
PRPR, are you not using 1116? Since neither your or her SS is taxable in US (by treaty) and she has no other CDn income, surely only your IRA can't be costing you any tax. It is litearlly the only US-taxable item on your return.
If you save much tax on your 1040's you are merely adding to your Cdn tax bill.
If you save much tax on your 1040's you are merely adding to your Cdn tax bill.
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
Hi Nelsona,
I was writing the post below when I saw your last one.
So to reply to your last post. I have been using 1116. Our Social Security income is from the US. I'm intrigued by your saying that it shouldn't be taxable for us by treaty. I thought that we had to pay it on the US taxes. Again I'm an American married to a Canadian living in Canada. My wife's Social Security income is because she is married to me.
Thanks so very much again.
Best Regards,
Rod Mell
Hi Nelsona,
I didn't notice that earlier post was from ND - thought it was a continuation from you. So thanks with getting back to confirming your original approach that we should each put half of the rental properties figures on each return.
So I take it that, with the limited information I have given you, that it should be okay for me to file separately and my Wife to file a 1040NR. On each return as well as the Canadian returns we would put half of all amounts for the rental property. Does that seem okay?
Again, thanks very much for all your help and thoughts.
Best Regards,
Rod
I was writing the post below when I saw your last one.
So to reply to your last post. I have been using 1116. Our Social Security income is from the US. I'm intrigued by your saying that it shouldn't be taxable for us by treaty. I thought that we had to pay it on the US taxes. Again I'm an American married to a Canadian living in Canada. My wife's Social Security income is because she is married to me.
Thanks so very much again.
Best Regards,
Rod Mell
Hi Nelsona,
I didn't notice that earlier post was from ND - thought it was a continuation from you. So thanks with getting back to confirming your original approach that we should each put half of the rental properties figures on each return.
So I take it that, with the limited information I have given you, that it should be okay for me to file separately and my Wife to file a 1040NR. On each return as well as the Canadian returns we would put half of all amounts for the rental property. Does that seem okay?
Again, thanks very much for all your help and thoughts.
Best Regards,
Rod
You should be excluding your SS from your US taxes. This is a treaty matter and has been this way for several years (20+) and applies to US citizens resident in canada.
Your SS is only taxble in canada, (at the 85% inclusion rate).
You report the gross on your 1040, and put 0 as taxable, attaching an 8833 explaining the treaty position. It is very familiar to IRS.
Article XVIII.5(a).
Your SS is only taxble in canada, (at the 85% inclusion rate).
You report the gross on your 1040, and put 0 as taxable, attaching an 8833 explaining the treaty position. It is very familiar to IRS.
Article XVIII.5(a).
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
Wow, that sheds a very different light on everything!
So here's how it looks like I should file now:
1. Joint return on 1040.
2. Line 15a & b IRA Distributions - my IRA withdrawals.
3. Line 16a Pensions - Total of my Wife's Canadian pensions.
4. Line 16b taxable amount - 0
5. Line 20a SS benefits - total of our benefits.
6. Line 20b taxable amount - 0
17. Rental real estate - Amount from Schedule E
Attach an 8833 explaining treaty provision.
Does that all look correct based on what I have told you?
Now I understand why you said my only US tax obligation is from the IRA. This will be huge help to us. I can't thank you enough!
Best Regards,
Rod Mell
So here's how it looks like I should file now:
1. Joint return on 1040.
2. Line 15a & b IRA Distributions - my IRA withdrawals.
3. Line 16a Pensions - Total of my Wife's Canadian pensions.
4. Line 16b taxable amount - 0
5. Line 20a SS benefits - total of our benefits.
6. Line 20b taxable amount - 0
17. Rental real estate - Amount from Schedule E
Attach an 8833 explaining treaty provision.
Does that all look correct based on what I have told you?
Now I understand why you said my only US tax obligation is from the IRA. This will be huge help to us. I can't thank you enough!
Best Regards,
Rod Mell
Not quite:
4. 16b would be the same as 16a, not zero. That is where your 1116 would come into play.You should be able to wipe out most if not all of her US tax with her Cdn tax on her Cdn pension.
When I said that your IRA was "litearlly the only US-taxable item on your return", iI meant taht it was the only thing that was completely taxable in US with no relief. with your exemption, deductions, exclusion fo ss and foreignm tax credits, I'm hard-pressed to see how your US tax would be very high, especilly considering that the US yax on your pension will then become a credit on your CDn return.
7. You stated you were at a loss on this investment.
4. 16b would be the same as 16a, not zero. That is where your 1116 would come into play.You should be able to wipe out most if not all of her US tax with her Cdn tax on her Cdn pension.
When I said that your IRA was "litearlly the only US-taxable item on your return", iI meant taht it was the only thing that was completely taxable in US with no relief. with your exemption, deductions, exclusion fo ss and foreignm tax credits, I'm hard-pressed to see how your US tax would be very high, especilly considering that the US yax on your pension will then become a credit on your CDn return.
7. You stated you were at a loss on this investment.
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
Just so you get the point: You should and will pay some US tax on your US pension. But with what I've shown you, and by filing jointly, it should still be less than the Cdn tax you pay on that pension, and the result will be that you get full credit for any US tax when you do your foreign tax credit on your Cdn return. Only if you have some US tax left over should you be looking at anything more tricky.
No need to get any fancier than that.
No need to get any fancier than that.
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
Okay, I'm going to do it again with all this incredibly good information. I'm sure our liability will be much lower now. When I did my preliminary run I had not included the 1116. So with that and not having to declare the SS income it should make a huge difference.
Thanks for the further clarification in your last post. Yes this is certainly fancy enough for me!
I just can't thank you enough for all this. Hopefully it will also be a help to someone else in similar circumstances. Your forum is a wonderful thing!
Best Regards,
Rod
Thanks for the further clarification in your last post. Yes this is certainly fancy enough for me!
I just can't thank you enough for all this. Hopefully it will also be a help to someone else in similar circumstances. Your forum is a wonderful thing!
Best Regards,
Rod