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The Rental Income Tax Rules

The Rental Income Tax Rules

If we were to buy a property in Florida, we would likely only be able to visit once a year up to 6 months for most Canadian “Snowbirds”.  For the rest of the time, instead of letting it sit still, the ideal situation is that the property could be rented on a weekly or monthly basis.  Sounds like a great idea with the potential for capital appreciation, but there are U.S tax rules to be followed. 
The IRS (Internal Revenue Service) will tax income from real estate owned by nonresident aliens. Snowbirds, who rent out their real estate located in Florida, should be aware that there’s a 30% withholding tax applied to the total amount of any rental payment to a resident of Canada. Unlike withholding taxes on interest and dividends, this tax is not reduced by the Canada-U.S. tax treaty. One way for Canadians to avoid the 30% gross withholding tax is to file a U.S. tax return and elect to pay tax on net rental income. The Canadian resident can then receive a refund for any taxes withheld. This will certainly benefit those Canadians who own U.S. rental properties and incur significant expenses (mortgage interest, maintenance, insurance, property management, property taxes, etc.), if they file a U.S. income tax return to the IRS, they can take advantage of the net rental income election. The amount subject to tax at the marginal rate will likely be substantially lower than the amount subject to 30% withholding.

 

It is not a surprise that the foreign nationals are subject to U.S. capital gains taxes on real estate sales as well. Because the U.S. IRS can’t easily go after foreign nationals to collect this capital gains tax, therefore, there is special U.S. tax “withholding” requirement when foreign nationals sell real estate. If a Canadian sells real estate located in the U.S., a withholding tax of 10% of the total sales price will be payable under FIRPTA (the Foreign Investment in Real Property Tax Act of 1980). The 10% withholding requirement on the gross sales price applies regardless of the seller’s adjusted basis in the property.

 

There are two exceptions to FIRPTA’s 10% withholding requirement which may reduce or eliminate the requirement.
Exception 1: Sales price less than U.S. $300,000. First, withholding under FIRPTA will not apply if the property is sold for less than U.S. $300,000, and the purchaser intends to use it as a principal residence. The buyer need not be a U.S. resident. For this exception to apply, the purchaser must have definite plans to reside at the property for at least half of the time during each of the two years after the sale. Thus, if a Canadian citizen is selling a Florida condo or any other U.S. real estate, for less than U.S. $300,000 to a buyer who intends to occupy it as a principal residence, the seller will receive the full purchase price rather than having 10% withheld by the buyer and remitted to the IRS.
Exception 2: Withholding certificate, where the Canadian obtains a withholding certificate from the IRS on the basis that the expected U.S. tax liability will be less than 10% of the sales price. The certificate will indicate what amount of tax should be withheld by the purchaser rather than the full 10%.