Form 4562 for Canadian Landlords in Ohio

# Form 4562 for Canadian Landlords: Claiming Depreciation on Ohio Rental Property ## What is Form 4562? Form 4562 (Depreciation and Amortization) is a required IRS form that calculates and documents depreciation deductions on depreciable assets, including residential rental property. For Canadian landlords owning rental real estate in the United States, this form is essential to claiming depreciation on Schedule E (Profit or Loss from Rental Real Estate and Royalties). Depreciation is a non-cash deduction that allows you to recover the cost of a building over its useful life. The IRS treats residential rental property differently from land—only the building structure depreciates, not the land itself, and only over a fixed period determined by US tax law. ## How Depreciation Works for Residential Rental Property Under US tax law, residential rental property depreciates using the **straight-line method over 27.5 years**. This is a fixed rule that applies equally to Canadian residents and US citizens. **Example calculation:** - Purchase price of Ohio rental house: $200,000 - Land value (not depreciable): $50,000 - Building value (depreciable basis): $150,000 - Annual depreciation: $150,000 ÷ 27.5 years = **$5,454.55 per year** This deduction flows through to your Schedule E and directly reduces your US taxable rental income. Importantly, this depreciation also has implications for your Canadian tax return (discussed below). ## Who Files Form 4562 **Any landlord—Canadian resident, non-resident, or US citizen—claiming depreciation on US rental property must file Form 4562.** There are no exemptions based on residency status. However, filing requirements differ: - **US residents and green card holders:** File Form 4562 attached to Form 1040 (US individual income tax return) - **Canadian residents (non-residents of the US):** File Form 4562 attached to Schedule E, which connects to Form 1040-NR (US Nonresident Alien Individual Income Tax Return) As a Canadian landlord, you'll be classified as a **non-resident alien** for US tax purposes and file Form 1040-NR, not the standard Form 1040. ## Ohio-Specific Context: Why This Matters Ohio imposes a **state income tax of 3.99% on rental income** for non-residents. While you won't file an Ohio state return unless you meet Ohio's threshold requirements (generally, minimal Ohio income triggers no state return requirement), the federal depreciation deduction you claim on Form 4562 reduces your federal taxable income on Form 1040-NR, which can indirectly affect your Ohio liability if you cross filing thresholds. Ohio's average effective property tax rate is **1.59%**, which is relatively moderate. These property taxes are deductible on Schedule E (line 8), separate from depreciation. ## Step-by-Step: How to Complete Form 4562 ### Part I: Election to Expense and Other Deductions Most Canadian landlords will skip Part I unless you've made a Section 179 election (which is uncommon for long-term rental property held by non-residents). Leave this section blank if you're claiming standard depreciation. ### Part II: General Depreciation System (GDS) **This is where you enter residential rental property depreciation.** 1. **Line 19a (Description of property):** Write "Residential rental house, [Ohio address], acquired [date]" 2. **Line 19b (Date placed in service):** Enter the date you acquired the property (or began renting it, if later) 3. **Line 19c (Basis for depreciation):** Enter only the **building value**, not land. This requires an allocation of your purchase price between land and building. - If you have an appraisal or property tax assessment, use the ratio shown - Example: If property appraised at $200,000 with land at 25% ($50,000), building basis is $150,000 4. **Line 19d (Recovery period):** Enter **27.5 years** (residential rental property is the only class using 27.5 years) 5. **Line 19e (Convention):** Select **Mid-month** (this is the only convention for real property) 6. **Line 19f (Method):** Select **Straight line** (required for all real property) 7. **Line 19g (Depreciation for this year):** The form will auto-calculate this based on the mid-month convention. For property placed in service mid-year, depreciation begins the month of acquisition and runs for the remainder of the tax year. **Example:** Property acquired April 15 means depreciation starts in May (8.5 months of the first year). 8. **Repeat for each property:** If you own multiple Ohio rental properties, enter each on a separate line. ### Part III: ACRS Depreciation Skip Part III—this applies only to property placed in service before 1987. ### Part IV and V: Other Depreciation Methods Unless you've elected alternative depreciation systems (uncommon for non-residents), leave these blank. ## Form 4562 on Your Canadian Tax Return **This is critical:** Canadian tax law requires you to report the same depreciation on your Canadian personal tax return (Form T776, Statement of Real Estate Rentals, filed with your T1 General return). However, Canada calls this "Capital Cost Allowance" (CCA), and the depreciation schedules differ from the US 27.5-year method. Canada typically allows **4% CCA annually on a declining-balance basis** for residential rental buildings acquired after March 19, 2007. This creates a **permanent difference** between your US and Canadian taxable income. **Example of the timing difference:** - US Year 1 depreciation (27.5 years): $5,455 - Canadian CCA (4% declining balance): $6,000 (4% of $150,000) You'll report the Canadian CCA on your T776 and the US depreciation on Form 4562/Schedule E. The foreign tax credit on Schedule 1 of your T1 return will account for any additional US taxes paid. The Canada-US Tax Treaty (Article XXII) provides relief mechanisms, but depreciation timing differences typically cannot be eliminated entirely. ## Ohio-Specific Considerations ### Non-Resident State Tax Implications Ohio does not tax non-residents on out-of-state rental income. However, if you also own rental property in Ohio or conduct a trade/business there, Ohio's 3.99% tax applies. The federal depreciation deduction on Form 4562 is claimed only on your federal 1040-NR; you do not separately file an Ohio IT-40NR (non-resident return) unless your Ohio-source income exceeds thresholds. **Key point:** Ohio respects the federal depreciation deduction, so if you claim $5,455 depreciation on Form 4562, this reduces your federal taxable rental income and, if you cross Ohio thresholds, your Ohio taxable income as well. ### Property Tax Deduction Interaction Ohio's 1.59% effective property tax rate is deductible on Schedule E (separate line from depreciation). Many Canadian landlords overlook this: property taxes, insurance, mortgage interest, and repairs are all separate Schedule E deductions in addition to depreciation claimed on Form 4562. ### Recapture Upon Sale Any depreciation claimed on Form 4562 creates depreciation recapture when you sell the property. The gain attributable to depreciation is taxed at 25% federal rate (Section 1250), not the more favorable capital gains rate. This applies equally in Ohio and other states. Plan ahead: if you sell the Ohio property, calculate your total depreciation claimed over the holding period. ## Common Mistakes 1. **Including land value in depreciable basis:** The #1 error. Land never depreciates. Properly allocate the purchase price between land and building. 2. **Starting depreciation before the property is in service:** Depreciation begins only when the property is ready to rent and generating income, not when you purchase it. 3. **Not adjusting for improvements:** Major capital improvements (new roof, HVAC system) have separate depreciation schedules. Do not depreciate them over 27.5 years; use the appropriate category (e.g., 15 years for certain improvements). 4. **Filing only US returns without reporting to Canada:** The Canada Revenue Agency (CRA) expects you to report foreign rental income and depreciation on your T1. Failing to do so can trigger audit or penalties. 5. **Confusing Form 4562 with Schedule E:** Form 4562 *calculates* depreciation; Schedule E *reports* it. Both are required. 6. **Forgetting mid-month convention:** If you acquired the property September 22,