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RENTAL INCOME FROM U.S. REAL ESTATE

You may be renting out your U.S. property on a part-time or full-time basis. As a non-resident alien, you are subject to U.S. income tax on the rental income.

Tax on Gross Rental Income

Subject to the next section entitled “Net Election on Rental Income,” the gross rents you receive are subject to a 30 percent withholding tax, which your tenant or property management agent is required to deduct and remit to the IRS. It doesn’t matter if the tenants are Canadians or other non-residents of the United States, or if it was paid to you while you were in Canada. An exception applies if the rental income is clearly effectively connected with a U.S. trade or business. Your rental income may not automatically be considered to be “effectively connected” if there is only a small amount of activity.

Net Election on Rental Income

As an alternative to paying the 30 percent tax on the gross rental income described above, you may prefer to elect to pay tax on the net income after deducting expenses. This could result in reduced tax and possibly no tax. The Internal Revenue Code permits this option if you choose to permanently treat rental income as income that is effectively connected with the conduct of a U.S. trade or business.

You can then claim expenses related to owning and operating a rental property during the rental period, including mortgage interest, property tax, utilities, insurance and maintenance.

You must also deduct an amount for depreciation on the building. However, the IRS only permits individuals to deduct the mortgage or loan interest relating to the rental property if the debt is secured by the rental property or is not secured at all. If you borrow the funds in Canada, secured by your Canadian assets, you would not technically be able to deduct that interest on your U.S. tax return. Special rules apply to corporations. Obtain strategic tax planning advice on this issue.

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