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When Canadians Rent Out Their US Home, Do They Owe Tax in the US?

Let’s take the case where a Canadian citizen is careful not to spend so much time in the United States so that he or she is not considered a US resident for tax purposes. Therefore this Canadian individual is not paying tax in the US on their worldwide income. This individual will still have to pay tax on their “US source income”, and this will include rental income from their property owned in the US. So how will the US tax the Canadian citizen who owns property in the US and rents that property out, but otherwise does not spend too much time in the US so as to be deemed a US resident for tax purposes?
Taxation of Rental Income- General Rule
As a general rule, the Canadian who rents out their US property is subject to a 30% withholding requirement of the gross amount of each rental payment. In other words, the general rule on rental income is that 30% of each rental payment made to a Canadian-citizen landlord should be withheld, and forwarded to the IRS. Technically, it is the renter (likely a US citizen) who has the legal requirement to withholding from the rental payments made to the Canadian citizen-landlord. As a practical matter, the IRS will look to both the renter and the landlord for the withholding amount. To the extent the Canadian citizen hires a US property manager (extremely common for the Canadian snowbird), the property manager will be responsible for withholding on the rental amounts and remitting the tax to the IRS. Since the Canadian citizen must also report this amount on his or her Canadian tax return, a foreign tax credit on the Canadian tax return should be available for the US taxes paid, so this should not result in double taxation.
Electing to Pay Tax on the Rental Income Like A US Citizen
The Canadian renting US property, however, has an alternative to the general withholding rule described above. Instead of the general withholding provision, the Canadian may choose to pretend he or she is a US taxpayer. How does this work? The Canadian files a 1040NR tax return. Why file a 1040NR? Because now, the Canadian taxpayer is taxed like a US taxpayer (at least with respect to the rental income from the US property), and that means the Canadian can take deductions against the income just like a US taxpayer does. What kind of deductions? Well, for example, the Canadian taxpayer may deduct property taxes and mortgage interest from the gross rental income. After taking deductions, the rental income may result in little to no taxable US income. Choosing this route will likely lead to the Canadian paying less US taxes because under this scenario only the rental “profits” are taxed in the US (and not the gross rental amount). The 1040 NR (together with a Schedule E for rental income) should be filed by June 15 of the year after receiving the taxable rental income. For property located in California, the Canadian taxpayer would also file a Form 540NR.

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