Form 8840 for Canadian Landlords in Ohio

# Form 8840: Closer Connection Exception for Canadian Landlords with Ohio Rental Property ## What is Form 8840? Form 8840 (Closer Connection Exception Statement for Aliens) is an IRS form that allows Canadian residents to claim an exception to the Substantial Presence Test (SPT), preventing automatic classification as a US resident for federal tax purposes. Without this election, a Canadian who spends too many days in the US during a calendar year could be deemed a US resident alien and subject to worldwide income taxation. For Canadian landlords owning rental property in Ohio, this form is often the difference between filing a single Canadian return versus managing dual tax residency across two countries. ## Understanding the Substantial Presence Test The SPT is mechanical and unforgiving. You're treated as a US resident alien if you meet either: 1. **Physical presence threshold**: Present in the US on at least 183 days during the current year, OR 2. **Weighted presence formula**: Present on at least 183 days over a three-year period, calculated as: - All days in current year (full weight) - Plus 1/3 of days in preceding year - Plus 1/6 of days in second preceding year For a Canadian snowbird landlord visiting Ohio to manage rental properties, inspect buildings, or attend tenant meetings, these days accumulate quickly. A casual two-month winter stay (60 days) in Ohio, combined with a spring inspection trip (20 days), plus a late summer visit (25 days) already totals 105 days—and that's before considering prior years' weighted calculations. ## How Form 8840 Applies to Ohio Landlord Situations Ohio presents a practical scenario for Form 8840 filers. As a non-resident alien landlord in Ohio, you must file Form 1040-NR (US Nonresident Alien Income Tax Return) reporting Ohio rental income. Additionally, Ohio requires non-residents to file an Ohio IT-40NR state return on rental income at the current rate of **3.99%**, separate from your federal obligation. By filing Form 8840, you're not eliminating US tax on your Ohio rental income—rental income remains taxable in Ohio and federally. Instead, you're asserting that despite meeting the SPT, you maintain a "closer connection" to Canada and should be taxed only as a nonresident alien (not a resident alien). This distinction matters significantly: - **Resident aliens**: Subject to US worldwide income taxation, including passive foreign investment fund rules, global capital gains, and limitations on the foreign earned income exclusion - **Nonresident aliens**: Taxed only on US-source income (like Ohio rent), with your Canadian income exempt from US taxation ## Who Must File Form 8840 You should file Form 8840 if **all three conditions** are met: 1. You meet the Substantial Presence Test for the current tax year 2. You have a "closer connection" to Canada (the primary residence, permanent home, family ties, and center of vital interests remain in Canada) 3. You are not a US citizen or green card holder For a Canadian landlord in Ohio, "closer connection" typically means: - Your primary residence is in Canada - Your spouse, dependent children, and close family remain in Canada - Your bank accounts, professional licenses, and business operations are primarily Canadian - You maintain Canadian healthcare coverage, voter registration, and driver's license - Your rental property in Ohio is investment-only, not a primary residence ## Step-by-Step: Completing Form 8840 ### Part I: Personal Information Enter your name, address (Canadian), Social Insurance Number (as Tax ID), and birth date. Use your Canadian residential address. ### Part II: Days of Presence Count your actual physical presence in the US during the calendar year (January 1–December 31). Include partial days—even arriving or departing counts as a day of presence. Track: - Days visiting Ohio rental properties - Days at US medical appointments - Days transiting through US airports Subtract any days you claimed closer connection exemptions in prior years, if applicable. ### Part III: Tax Home Location Identify where your "tax home" is located. For Form 8840 purposes, your tax home should be in Canada. The IRS defines tax home as the location of your principal place of business or, if you don't have one, your regular place of abode. ### Part IV: Closer Connection Declaration Check the box affirming that your closer connection to Canada is stronger than to the US. Provide brief supporting facts: - "Permanent residence in Canada; spouse and two children reside in Ontario" - "Investment-only property in Ohio; all business operations in Toronto" - "Healthcare and professional licenses in Canada" ### Part V: Signature and Attestation Sign and date. Form 8840 must be filed with Form 1040-NR (your federal nonresident return) or attached to your amended return if you've already filed. ## Ohio-Specific Considerations ### Ohio State Income Tax on Rental Income Ohio assesses non-resident rental income at **3.99%** on federal taxable income. You'll file Ohio Form IT-40NR (Non-resident Individual Income Tax Return) concurrently with your federal Form 1040-NR. Filing Form 8840 federally does not exempt you from Ohio state tax—Ohio does not recognize the "closer connection" exception to the SPT. Therefore: - **Federal level**: Form 8840 allows you to be taxed as a nonresident alien only on US-source income - **Ohio level**: You remain subject to Ohio's 3.99% tax on Ohio-sourced rental income regardless ### Ohio Property Tax Considerations Ohio's effective property tax rate averages **1.59%** on rental property. This is a combined state and local burden. Ensure your gross rental income calculation accounts for both state income tax (3.99%) and property tax liabilities when determining your actual net return on the Ohio investment. Neither of these taxes is eliminated by Form 8840; both remain obligations. ### Form 1040-NR Filing Requirements You must file your federal return using Form 1040-NR, Schedule E (or Schedule NEC if applicable for rental income reporting), and attach: - Form 8840 (Closer Connection Exception) - Schedule C or Schedule E detailing Ohio rental income and expenses - Depreciation schedules (Form 4562) - Any US withholding statements or 1099 forms The filing deadline for US nonresidents is **June 15** (not April 15), provided you file Form 8840 as an attachment. Without Form 8840, the deadline reverts to April 15. ## Canadian Tax Filing Implications Your Form 8840 election affects only your US tax residency classification. For Canadian purposes, you remain a Canadian resident if you maintain significant residential ties in Canada (per the *Income Tax Act*). You must file your T1 General (Canadian income tax return) annually, reporting worldwide income including your Ohio rental income. The Canada-US Tax Treaty (Article IV) helps prevent double taxation. You can claim a non-resident withholding credit on your T1 General for US taxes paid on the Ohio rental income, reducing your Canadian tax liability. Coordinate your US filing (Form 8840 + 1040-NR) with your Canadian T1 to maximize foreign tax credits. ## Common Mistakes to Avoid 1. **Miscounting days of presence**: Remember, partial days count. Days spent in the US during connections between flights count. Be meticulous; use a calendar or day-tracking spreadsheet. 2. **Confusing federal and state filing**: Form 8840 is federal only. Ohio still requires Ohio IT-40NR state return filing and Ohio state tax payment. Do not assume state-level relief. 3. **Failing to attach Form 8840 to 1040-NR**: If you file 1040-NR without attaching Form 8840, the June 15 deadline does not apply. Always attach the form and file together. 4. **Overstating "closer connection" facts**: The IRS scrutinizes closer connection claims for non-compliance. Ensure facts genuinely reflect your circumstances. Exaggerating Canadian ties invites audit risk. 5. **Ignoring the three-year weighted formula**: Even if current-year days are under 183, your weighted three-year total might exceed the threshold. Calculate backwards. ## Key Deadlines and Filing Logistics - **June 15 of following year**: Deadline to file Form 8840 with Form 1040-NR (if Form 8840 is attached) - **June 15 of following year**: Deadline to file Ohio IT-40NR state return - **October 15**: Extended deadline available (automatic six-month extension if Form 4868 filed) File electronically via IRS e-file systems or mail to the IRS address specified in Form 8840 instructions. Maintain copies for your Canadian tax records. --- ## Key Takeaways for Ohio Landlords