New Brunswick Landlord with Kentucky Rental Property

## US Rental Property Tax Guide for New Brunswick Landlords: Kentucky Edition Owning rental property across the Canada–US border creates a unique tax situation. As a New Brunswick resident with Kentucky rental income, you're subject to taxation in three jurisdictions: Canada (federal and provincial), the United States (federal), and Kentucky (state). Without proper planning, you could face double taxation, missed deductions, and penalties. This guide walks you through your obligations in each jurisdiction. ## Why New Brunswick + Kentucky Creates Complexity New Brunswick has no provincial sales tax on most services and a lower top marginal tax rate (around 20.3% on investment income) compared to some provinces. However, this advantage disappears if you don't properly manage your US tax filings. Kentucky imposes a 4.5% state income tax on non-resident rental income and an average effective property tax rate of 0.86%, among the lowest in the US. The real complexity arises from coordinating CRA rules, IRS requirements, and Kentucky state obligations—each with different reporting forms, deadlines, and withholding rules. ## Your CRA Obligations (Canadian Reporting) ### Reporting Rental Income on Form T776 You must report all worldwide rental income on **Form T776** (Statement of Real Estate Rentals), filed with your personal tax return (T1 General). This includes: - Gross rental income (in Canadian dollars) - Allowable expenses (mortgage interest, property taxes, utilities, maintenance, insurance, property management fees) - Depreciation (capital cost allowance, or CCA) on the building only—not land **Currency conversion:** Convert all US dollar amounts to CAD using the Bank of Canada exchange rate for the year of receipt. For 2025, use approximately **1 USD = 1.36 CAD** (annual average). The CRA will specify the exact rate in published tables for your tax year. ### Reporting Foreign Property: Form T1135 If the **fair market value** of your Kentucky property exceeds **$100,000 CAD** at any point during the tax year, you must file **Form T1135** (Foreign Income Verification Statement) with your tax return. Most landlords with US rental property will exceed this threshold. On T1135, you'll report: - Property address and description - Cost basis (in CAD) - Fair market value at year-end (in CAD) - Rental income earned from the property (in CAD) **Failure to file T1135** when required results in a **$25 per day penalty**, up to **$2,500 per year**, regardless of whether you owe additional tax. ### Foreign Tax Credit for Kentucky Taxes Paid You cannot deduct Kentucky state income tax as an expense on T776. Instead, you must claim a **non-resident foreign tax credit** on your Canadian return. Here's how this works: 1. You pay Kentucky state income tax (4.5% of rental income) 2. You also pay Canadian federal and provincial income tax on the same income 3. You claim a credit on **Schedule 1** (Federal Tax), line 40500 (Federal Foreign Tax Credit) The credit is limited to Canadian tax paid on the foreign income. If you've overpaid, you cannot carry the excess forward in most cases. **Example (simplified):** - US rental income: USD $10,000 (≈ CAD $13,600) - Kentucky tax owed: USD $450 (≈ CAD $612) - Canadian tax on $13,600 at marginal rate of 43.3%: ≈ CAD $5,888 - Foreign tax credit claimed: CAD $612 (limited to Kentucky tax actually paid) ## Your IRS Obligations (US Federal) ### Obtain an ITIN (Individual Taxpayer Identification Number) Non-US citizen landlords cannot use a Social Insurance Number (SIN) for US tax purposes. You must apply for an **ITIN** using **Form W-7** (Application for IRS Individual Taxpayer Identification Number). Submit this with your first US tax return, or apply separately at a US consulate in Canada (Halifax, Montreal, Toronto, or Vancouver). Your ITIN is valid indefinitely as long as you file a US tax return at least once every three years. ### File Form 1040-NR (Non-Resident Alien Return) As a non-resident alien with US source income, you file **Form 1040-NR** (U.S. Income Tax Return for Nonresident Alien Individual) instead of the standard 1040 form. This form is due **June 15, 2025** for the 2024 tax year (non-residents get an automatic two-month extension). ### Report Rental Income on Schedule E Attach **Schedule E** (Supplemental Income or Loss) to your 1040-NR. On Schedule E, Part I, report: - Gross rental income (in USD) - Mortgage interest, property taxes, insurance, repairs, maintenance, utilities, HOA fees, advertising, property management fees - Depreciation (straight-line method; typically 27.5 years for residential property) The IRS allows you to deduct the same expenses you deduct in Canada. Do not double-benefit: if you claim CCA in Canada, you claim depreciation in the US on the same property. ### Section 871(d) Election: Avoid 30% Withholding By default, US renters may withhold **30% of gross rental income** (called "FIRPTA withholding," though technically Section 871(d) withholding). However, you can file **Form 8288-B** (Statement of Non-US Person's Withholding on Dispositions by Foreign Persons) with your US tax return to **elect out of the 30% withholding** and instead pay tax on net rental income (after expenses). This election is almost always advantageous. Filing it signals to the IRS that you're reporting rental income on a net basis and managing your US tax liability properly. **How it works:** - Without the election: 30% of USD $10,000 gross = USD $3,000 withheld - With the election: You report USD $10,000 – USD $8,000 (expenses) = USD $2,000 net income, and pay tax on $2,000 only ## Part XIII Withholding (CRA Rule for Rental Income) **Important:** Even if you file T776 and claim all Canadian expenses, the CRA may still require US-source rental income to be subject to **Part XIII non-resident withholding (25% on gross rents)** if you don't file an **NR6 certificate** with the property manager. To avoid this withholding: - File **Form NR6** (Undertaking – Request for Exemption from Part XIII Tax) with your Canadian rental manager or US property manager - The NR6 certifies that you are a Canadian resident and will report the income - Without NR6, your property manager (or their agent) may withhold 25% of every rent cheque Most US property managers are unfamiliar with NR6, so you may need to educate them. Some use a **US-based registered agent** who can file NR6 on your behalf. ## Kentucky State Income Tax Obligations ### File Form 740 (Non-Resident Return) Kentucky requires non-residents to file **Form 740-NR** (Kentucky Non-Resident Individual Income Tax Return) to report rental income earned in the state. This return is due **June 15** (same as federal). On Form 740-NR, you report: - Kentucky-source rental income (USD) - Expenses allocable to Kentucky (a pro-rata share if you own property in multiple states) - Tax owed at 4.5% ### What Expenses Are Deductible? Kentucky allows deduction of the same expenses the IRS allows on Schedule E. Do not include expenses twice (e.g., if you deduct mortgage interest in the US, don't deduct it again in Kentucky). ### No Kentucky Corporate Withholding Unlike some states, Kentucky does not require tenants or property managers to withhold state income tax. However, you must calculate and remit Kentucky tax yourself by the filing deadline. ## Selling the Kentucky Property: FIRPTA If you later sell the Kentucky rental property, be aware of the **Foreign Investment in Real Property Tax Act (FIRPTA)**. When a non-US person sells US real property, the **buyer must withhold 15% of the sale price** and remit it to the IRS. You'll report the sale on **Form 8288** (U.S. Withholding Tax Return for Dispositions by Foreign Persons). The withholding is a credit against your US capital gains tax. You'll report the gain on your 1040-NR in the year of sale. You may also owe Kentucky tax on any capital