Rental and sale of U.S. real estate: Our tax specialists answer your questions

A tax specialist is a professional who specializes in the application and interpretation of tax rules and regulations. These often complex rules are constantly evolving. The tax specialist’s role is to advise clients so that their tax burden is minimized to the extent permitted by law. The courts in all jurisdictions have long recognized that, unless otherwise provided by law, taxpayers are entitled to arrange their affairs to attract the minimum amount of tax.

We have called upon the contribution of tax experts from the Raymond Chabot Grant Thornton network for a series of articles providing answers to questions raised by our clients doing business abroad.

Q: If I rent out real property located in the U.S. (condo/house), do I have to file a U.S. tax return?

A: A non-resident of the U.S. who receives rental income from property located in the U.S. is technically subject to a U.S. withholding tax of 30% on the gross rental income. To avoid this holdback, the taxpayer must make an election to file a U.S. tax return (1040NR, U.S. Nonresident Alien Income Tax) and pay U.S. tax on his net rental income. The net rental income is also taxable in the U.S. As applicable, the tax payable in the U.S. may entitle the taxpayer to a foreign tax credit in Canada, thereby avoiding dual taxation.

Q: If I rent out real property located in Florida (condo/ home) for less than six months, do I have to collect the Florida sales tax?

A: Yes. As far as the State of Florida is concerned, you must collect and remit, within the prescribed time limit, the applicable sales tax for rental periods of less than six months. The current sales tax rate in the State of Florida is 6% but could be higher in certain counties. The tax liability and applicable tax rates vary from State to State.

Q: If I sell real estate located in the U.S. (condo/home), do I have to file a U.S. tax return?

A: Yes. A U.S. tax return (1040NR, U.S. Nonresident Alien Income Tax) must be filed in the U.S. to report the capital gain earned on the disposition of the property, and, if applicable, to pay U.S. tax on this gain.

Q: Must I also report this capital gain in my Canadian income tax return?

A: Yes. This capital gain is also taxable in Canada and must be reported by the Canadian resident in his tax return. As is the case for rental income, the Canadian taxpayer will be entitled to a foreign tax credit for the U.S. tax paid on this capital gain.

Q: I sold real estate in the U.S. and a 10% or 15% U.S. withholding tax was applied to the proceeds of sale. Is this right?

A: The sale of U.S. real estate by a non-resident is subject to a 10% or 15% withholding tax on the gross proceeds of sale under the FIRPTA rules (Foreign Investment in Real Property Tax Act of 1980). The buyer may not be required to deduct the withholding if both of the following conditions are satisfied::

  • The property is sold for less than $300,000 US; and;
  • The buyer intends to use the property for personal purposes.

Do you have questions relating to U.S. tax issues? The tax experts of Raymond Chabot Grant Thornton can help you!

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