New Brunswick Landlord with Alabama Rental Property

## US Rental Property Taxation for New Brunswick Landlords: The Alabama Guide Owning rental property across the Canada–US border creates a dual tax filing requirement that many New Brunswick landlords don't anticipate. When you earn income from an Alabama rental property, you must report it to both the Canada Revenue Agency (CRA) and the Internal Revenue Service (IRS), plus the State of Alabama. Each jurisdiction has different rules, deadlines, and withholding obligations. Understanding this framework is essential to avoid penalties, unnecessary withholding, and missed foreign tax credits. This guide walks you through the complete tax picture for a New Brunswick resident (Canadian tax resident) who owns residential or commercial rental property in Alabama. ## Why This Combination Matters New Brunswick residents are taxed on worldwide income by Canada. Alabama is one of the few US states that taxes non-resident income at the state level. Combined, you face: - **CRA taxation** of worldwide rental income (including US source income) - **IRS taxation** of US source income at federal rates up to 37% marginal rate - **Alabama state income tax** at 5% on non-resident rental income - **Mandatory withholding** if you don't file correctly - **Foreign tax credit eligibility** that can offset some US taxes paid The key to efficiency is filing on time, making the right elections, and tracking which taxes paid in the US can be credited against Canadian tax owing. ## CRA Obligations: Reporting Your Alabama Rental Income ### Filing the T776 (Rental Income Form) You must report all rental income (gross rents, not net) to the CRA on **Form T776 Statement of Real Estate Rentals**. This form is part of your annual personal tax return (T1 General) filed by June 15 for self-employed individuals, or April 30 for employees. On the T776, you report: - **Gross rental income** in Canadian dollars (converted using Bank of Canada annual average rate) - **Allowable deductions**: mortgage interest, property taxes, insurance, utilities, repairs, property management fees, and capital cost allowance (CCA) - **Non-allowable items**: capital improvements, principal mortgage repayment For 2025 tax year: use the Bank of Canada annual average rate of **1 USD = 1.36 CAD** for income and expense conversion. ### T1135 – Foreign Property Declaration If the fair market value of your Alabama property exceeded **CAD $100,000** at any time during the tax year, you must file **Form T1135 Foreign Property Declaration** with your tax return. Report: - Address and description of the property - Fair market value in Canadian dollars (converted at year-end rate, not average rate) - Cost basis - Income earned in the year (gross rental income) Failure to file T1135 can result in a **$2,500 penalty** plus potential loss of foreign tax credits. ### Foreign Tax Credit (FTC) This is where you recover US taxes paid. You can claim a **non-business income foreign tax credit** on Schedule 1 of your T1 General for: - US federal income tax paid on rental income - Alabama state income tax paid (5%) - Property taxes paid to Alabama county assessors The credit is limited to the lesser of: 1. Actual tax paid in the US 2. Canadian tax that would be owing on that US source income **Important:** You can only claim actual tax paid — not withholding that was refunded to you or tax estimated but not yet paid. ## IRS Obligations: Your US Tax Return Requirement ### Obtaining an ITIN (Individual Taxpayer Identification Number) As a non-US citizen earning US rental income, you must obtain an **ITIN (Individual Taxpayer Identification Number)** from the IRS. You cannot use your Social Insurance Number (SIN) for US tax purposes. Apply using **Form W-7 Application for IRS Individual Taxpayer Identification Number** with supporting documents. Processing takes approximately 2–4 weeks. You'll need this ITIN on all US tax filings. ### Filing Form 1040-NR (Non-Resident Alien Return) You must file **Form 1040-NR U.S. Non-Resident Alien Income Tax Return** annually if: - You have US source rental income - You haven't elected out of withholding (see below) - Your income exceeds the filing threshold (which varies, but rental income typically requires filing regardless of amount) File by **April 15, 2025** for the 2024 tax year. If you reside outside the US, you may request an automatic 6-month extension until October 15. ### Schedule E – Profit or Loss from Rental Property Attach **Schedule E** to your 1040-NR showing: - Gross rents received - Deductible expenses (same categories as T776: mortgage interest, taxes, insurance, repairs, utilities, etc.) - Net rental income or loss - Depreciation (US tax allows depreciation of building structure, not land, typically over 27.5 years for residential property) ### Section 871(d) Election – Avoiding 30% Withholding This is a critical election for cross-border landlords. Without it, you face a **default withholding of 30% of gross rental income** to the IRS. By making a **Section 871(d) election** (filed on Form 8833, Notice of Inconsistent Treatment), you: - Treat rental income as effectively connected income (ECI) - Pay tax only on **net income** (gross minus deductible expenses), not gross - Use the same deductions you claim on your 1040-NR Schedule E - Avoid the 30% withholding on gross rents File Form 8833 with your 1040-NR. This election applies automatically in future years unless you revoke it in writing. **Without this election**, a property manager or rental agency in Alabama could be obligated to withhold 30% of every rent payment, creating significant cash flow problems. With the election, withholding depends only on whether you've filed the proper forms with the IRS. ## Alabama State Tax Obligations ### Alabama Income Tax on Non-Resident Rental Income Alabama imposes a **5% state income tax** on non-resident rental income. As a non-resident, you are taxed only on Alabama-source income, which includes net rental income from real estate located in Alabama. File **Form 40-NR Alabama Non-Resident Individual Income Tax Return** by April 15 (or extended deadline) if: - You have net Alabama-source income exceeding the state filing threshold - You had Alabama income tax withheld that you want refunded ### Property Tax in Alabama Alabama counties assess property tax on real estate annually. The **statewide average effective property tax rate is 0.41%** (among the lowest in the US), but rates vary by county. Example: A $300,000 rental property in a county with a 0.50% effective rate incurs approximately **$1,500 CAD annually** in property taxes (using 1.36 exchange rate). Property taxes are deductible on both your CRA T776 and your IRS Schedule E, and also eligible for foreign tax credit on your Canadian return. ## Selling the Property: FIRPTA Considerations When you sell your Alabama rental property, special withholding rules apply under the **Foreign Investment in Real Property Tax Act (FIRPTA)**. ### FIRPTA Withholding The buyer's closing attorney or title company must withhold **15% of the gross sale price** and remit it to the IRS, unless you obtain a **Certificate of Non-Foreign Status** or a **FIRPTA Withholding Certificate**. To avoid excessive withholding: 1. Complete **Form 8288-B Application for Withholding Certificate for Disposition by Foreign Person of US Real Property Interest** before closing 2. Include your ITIN, property address, sale price, and expected gain 3. The IRS issues a certificate stating the withholding amount (often lower than 15%) Without this certificate, 15% is withheld on the gross sale price, not net gain. This can result in a large refund claim when you file your final 1040-NR. You'll also report the sale on **Form 8949 Sales of Capital Assets** (or Schedule D, depending on your situation) attached to your 1040-NR in the year of sale. ## Key Deadlines for New Brunswick Landlords | Task | CRA Deadline | IRS / Alabama Deadline | Notes | |------|--------------|----------------------|-------| | File T776, T1135, foreign tax credit (Schedule 1) | June 15, 2025 (self-employed) | — | Use 1.36 CAD/USD rate | | File 1040-NR, Schedule E, Form 8833