US Real estate taxation -

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david ingram replies:

The following should help you and keep you busy interpreting them.

Hi David,

I plan on purchasing a Residential Short Term rental property in Florida in my 
personal name.

What is the tax implications on the yearly revenue?US and Canada?

When I sell the property what are the tax implications on the equity?

Regards,

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david ingram replies:

Too busy to deal with this - these older questions will / should give you what you need. There is no state income tax in Florida.
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QUESTION: Buying real estate in the US.

Hi David,

I'm sure you're getting a lot of these inquiries lately!

If I were to purchase a property in the US, not to be rented out, what am I obligated to declare at tax time?
Do I have to declare in Canada and the US?

If I were to sell said property, I understand that the US gov't withholds approx 30% of any capital gains.  Is that correct?   Would I also have to declare this in Canada?

Many thanks,

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DAVID INGRAM REPLIES:

I am and here are a bunch of older answers that may help.

QUESTION:

IS IT BETTER TO BUY A HOUSE IN THE U.S. IN YOUR PERSONAL NAME OR A COMPANY NAME.


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david ingram replies:

I think you are 99 out of a 100 better off to buy in your own name.  If it is a rental - do NOT work on it yourself.


david ingram replies:

You need a property manager if you do not want the strong possibility of going to jail for a few days before being deported and then not allowed back in the USA. For a story about US Immigrations hell for a Holiday Inn Manager, try
http://apostille.us/news/local_holiday_inn_express_manager_in_jail_on_immigration_charges;_husband_fights_for_her_return.shtml
or how about a married woman's ordeal in Georgia for a traffic violation  at
http://www.canada.com/ottawacitizen/news/story.html?id=f4f1d2fb-07ae-4560-8f6c-703acf8146fb&k=0

Crossing the border when you have an ad running to show the premises and saying you are going down to spend the weekend in your holiday home (i.e lying to the HOMELAND Security official) could result in seizure of your vehicle and a ban for up to 10 years under their ER (Expedited Removal) process.  In other words, it is more serious to lie to the guard at the border than it is to do the work.

You 'could' actually show the property for rent,  but you can NOT write out a contract for rent or collect a single rent cheque (check) or cash for rent in the United States. There is nothing new about this.  The first time I ran into it was in 1972 or 1973.

If you are physically there, you can NOT cut the grass, shovel the sidewalk, paint or decorate or repair or fix or remodel or improve or take out the garbage for any part of the rental property.

You can paint and clean your own unit if it is NEVER rented or intended to be rented. You can not paint and clean up getting the property ready for rent so DO NOT make the mistake of thinking you can live in one, clean it up and remodel it and then rent it out and do the same for another one and then another one and another one. If you do this and one of your tenants (who maybe doesn't like you because you evicted them or told them to turn their stereo down when you happen to be in town or for any other reason) read my website, (or the uscis website) he or she would find out that you can NOT do this stuff and could phone the Homeland Security office or write an anonymous letter and you could be arrested in November 2008 for something you did in December 2007. 

This may seem unreal, but in US terms, working without a visa is just as serious in law as the spontaneous robbing of a convenience store and the penalties can be worse.  Think of those nightly news shows with 28 illegal Mexican or Guatemalan citizens being stuffed into Paddy wagons on the Arizona border. This is not a racist comment but with the Mexican illegal immigrants, bing rounded up and shipped back across the border is a way of life with no social stigma.  For a nice clean living Canadian, being thrown into an immigration detention cell for taking money for rent is a devastating experience. In one case, a mother and her son were thrown into jail for 5 days in Phoenix when she went to Phoenix from White Rock BC.  Her husband owned 18 units and HAD a property manager.  Unfortunately, he also died in the arms of that female property manager and his widow then fired the property manager and she and her 20 year old son went to Phoenix to collect the rent and hire another property manager.

The property manager (who knew the law as everyone in Arizona does) phoned Homeland Security who showed up and arrested mother and son and threw them into the notorious Phoenix Immigration hell with some 300 other illegals. To rub salt into the widow's wounds, the property manager ended up with the property because she was a second mortgage holder on the property and the property fell into default because of the widow's cash flow troubles, largely because she could not go to Phoenix to hire another property manager.

For instance, for 'you', this kind of arrest could result in imprisonment for a usual five days in a US immigration jail until you posted $5,000 bail each and then being banished from the US for five to ten years. 

It does not stop there.  This type of conviction would stop you getting on an airplane which stopped in the USA on the way to Mexico.  AND,  under new US laws that have been proposed but not yet actually put in place, the arrest and banning would stop your Nov 6 trip to Cancun because people in this position will not even be allowed on commercial airliners that are flying over any part of the US. To get to Cancun, you would have to fly from Calgary or Vancouver to London England and then back to Mexico City and 'then' to Cancun and reverse it to get home.

This may be overkill but 'You' are / were lucky that the inspector gave you the correct advice BEFORE you put your foot in it.

By the way, for income tax You ALSO HAVE TO FILE A 1040NR US TAX RETURN WITH A SCHEDULE E AND A SCHEDULE 4562  EACH.  Then the same income gets put on Schedule T776 of your Canadian return.  If you have paid tax to the US, you will claim it as a credit on Canadian forms T2209 and T2036.


These older questions will help you AS WELL.

QUESTION: Hello David,

I'm living in Vancouver, finally paid off the student debt but don't see myself getting into 

the expensive Vancouver market. I do however like to ski and was thinking of buying an 

inexpensive trailer (25k Cdn) in Maple Falls Washington. 

However I'm not sure what other expenses I should expect given that it's in the US. 

I'm not trying to make this an investment with a high return, but I would like to do some 

handy work to it to increase the value. If I add about 10k worth of value, how would that 

affect my taxes in the long term?

Thanks for the advice.

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david ingram replies:

One of my favourite weekends ever was in 1973 at the Chandelier (think it has a different name now) when marooned at SnowLine  because of the gas shortage when one could only buy gas on odd days if your licence plate ended with an odd number and even days when it was an even number.

Strangely, it was that weekend 34 years ago that lets me answer you question now.

The cabin I was staying in was not a rental but was built by the fellow who owned it.  When he was building it, buddies would come down and help him and one weekend, the INS raided the spot and deported a bunch of his friends for working in the US .

He was fine building it because he owned it but no one else can hammer a nail, paint a board, install a sink, or carry a shingle if they are not either an owner or a legal US citizen or US resident with a green card.

If your buddy is working and living in the US with a TN, H1, O1, P1, L1 or any other visa but a green card, they cam NOT help you either.

And, if you are intending to rent the trailer out 'EVER', 'you' can NOT hammer a nail, sweep the front steps or clean the toilet.


Assuming you are buying this trailer on its own lot, when you go to sell, you will owe the US income tax on the profit.

If it is your only piece of real estate at that time, you will not owe Canada any tax because you can claim it as your personal residence if you have not bought another place.
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However, I would far prefer that you stretched your resources to buy something in Canada to live in and combine your present rent and the payments you would have to make for the trailer to buy your home in Canada. If you can't afford a one bedroom, buy a studio.  Go down to Ike on the Lougheed highway and look at how much they can put into a small space.  

Interestingly, I read the other day that IKEA has now sold enough furniture in North America that 10% of all children are conceived in an IKEA Bed.  Now that is information worth knowing.

Good luck

.
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david ingram replies:

Assuming that you are going to rent the property out, you will need an ITIN (Individual Taxpayer Identification Number).   Fill in a W-7 and submit it with your first tax return or try and get it at the bank where you get your mortgage. 

I do not suggest a corporation in either country unless you want to spend a couple of thousand dollars a year extra on accounting.  As a foreigner with a US corporation, you will need to fill in form 5472 with your 1120 corporation tax return.  Then, because the mind and control of the corporation is in the hands of a Canadian resident, you will need to file again in Canada.

 This older Q & A may help

My wife and I are Canadian citizens and own a rental property (house) in Arizona. 

Do I need to file income tax in the USA? Can we deduct the mortgage interest 

and any expenses associated with the rental on our Canadian income tax return?
Thanks and regards,
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david ingram replies

If you do not file a US 1040NR with Schedule E and Arizona 140PY or 140NR return, you face the likely Federal penalties of a $1,000 to $10,000 fine each per year for failure to report rental income as a non-resident plus 30% of the gross rent with no expenses allowed.  

That is for each of you if you both own the property.  And, I  have never seen a $10,000 penalty.

Then, you will EACH be assessed 30% of the gross rent with no expenses allowed.

(Canada's penalty of  just 25% of the gross rent with no expenses in reverse seems mild in comparison.)

FILE the US returns for every year you have missed.

THEN - There is NO responsibility for you to claim any rental expenses on your Canadian return.  You can claim them if you wish on form T776.  HOWEVER, you MUST report the gross rent on line 126 of your T1 if you do not claim expenses and the net rent if you do,.If there is a legitimate rental loss which has not been created by your using the unit personally, you can use the loss to reduce your other taxable income.

A Warning.  There is ample evidence that the IRS and CRA are pro-actively sharing information about these.  And, if you are in a complex and using the unit personally NEVER talk about the fact you have not filed a US tax return and don't ask a local.  I personally know of two people who make their living turning in Canadians who are not filing their US returns.  There is a 10% to 30% reward for turning you in by filing US form 211. See it at www.irs.gov - click on forms, etc.

If you need help with this, you now know where we are.
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--QUESTION:

We have a rental property in the US.  Can I claim the property taxes paid on my condominium as a rental expense deduction on my Canadian taxes?  Form T776 mentions only Canadian property taxes however, the general guide states that all expenses can be deducted.


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david ingram replies:

Anything that can be claimed on schedule E of the US return can be claimed on Canadian rental form form T776

You need to do your Schedule E 1040NR first and then convert the US 
figures to the T776 on  your Canadian return.  If the condo is in 
Arizona, you would do a 140NR or if in California, a 540NR.

There is no 
state tax in Florida, Texas or Nevada, the other three popular places for a 
Canadian to have a rental US condo.

The difference between the two countries is the method of claiming depreciation.  In the US, you MUST calculate the depreciation and include it even if it creates a loss.  The good news is that the operating loss caries forward as a future deduction against rent OR Capital Gains as opposed to non-resident losses in Canada which  unfairly disappear into the ether.

In Canada, you do NOT have to claim it  and if you do, can only claim enough to create a zero rental. Depreciation or  CCA (capital cost allowance) as we call it can NOT be used to create or increase a loss.

Make sure that you do the US returns, particularly if you are  losing money.  The penalty can be a minimum of $1,000 to $10,000 PLUS 30% of the gross rent for failure to file a US rental return by a  non-resident.

We, of course, are ideally suited to look after these for 
you by fax, snail mail, email or courier.

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