New Brunswick Landlord with Rhode Island Rental Property

## US Rental Property Ownership: A New Brunswick Landlord's Guide to Cross-Border Taxation Owning rental property in Rhode Island as a New Brunswick resident places you at the intersection of two tax systems. Neither jurisdiction views you as a domestic taxpayer—Canada taxes you on worldwide income, while the US taxes non-residents only on US-source rental income. Rhode Island adds a third layer. Understanding how these systems interact, rather than conflict, is essential to minimizing tax leakage and staying compliant. This guide walks you through the specific obligations, election strategies, and timelines that apply to your situation. ## Understanding the Two-Country Tax Picture ### Why This Matters for New Brunswick Residents As a Canadian resident, the Canada Revenue Agency (CRA) requires you to report worldwide income, including US rental profits. Simultaneously, the Internal Revenue Service (IRS) taxes non-residents on US real estate income at a flat 30% federal rate—unless you make a specific election. Rhode Island then layers its 5.99% state income tax on top. The good news: Canada and the US have a tax treaty that prevents double taxation. The bad news: you must properly claim foreign tax credits and file forms in both countries to access that relief. **Currency consideration:** For 2025, use the Bank of Canada annual average exchange rate of approximately 1 USD = 1.36 CAD. Convert all US income and expenses on this rate for CRA reporting. ## CRA Obligations: Reporting Your US Rental Income ### File Form T776 (Statement of Real Estate Rentals) Every tax year, file T776 with your Canadian tax return. This form requires: - **Gross rental income** (in Canadian dollars, converted at the annual average exchange rate) - **Operating expenses** (mortgage interest, property tax, insurance, utilities, repairs, maintenance, property management fees, advertising) - **Capital cost allowance (CCA)** claimed (optional but common for rental properties) **Key point:** CCA is optional. Many landlords claim it to reduce taxable income, but reclaiming CCA creates recapture when you sell. Consult a cross-border accountant before deciding. ### File Form T1135 (Foreign Income Verification Statement) If your US property's cost basis exceeds CAD $100,000, you must file T1135 by June 15 following the year in question. This form reports: - Property location and description - Cost basis (in CAD) - Fair market value at year-end (in CAD) - Income earned that year (in CAD) Failure to file T1135 triggers a $25 per day penalty (up to $2,500 per year). This form is separate from your tax return but required for CRA compliance. ### Claim Foreign Tax Credit (Form T2209) The US will withhold or tax your rental income. Use **Form T2209 (Federal Foreign Tax Credits)** to offset your Canadian tax by the US tax paid. **Example calculation:** - US rental income: USD $10,000 - CRA convert to CAD: CAD $13,600 (at 1.36 rate) - Assume 30% federal US tax withholding: USD $3,000 (CAD $4,080) - This credit reduces your Canadian federal tax owing The credit is capped at the Canadian tax you'd pay on that income, but typically you'll use it fully. ## IRS Obligations: US Federal Tax Filing ### Obtain an ITIN (Individual Taxpayer Identification Number) Before filing any US form, non-residents must obtain an ITIN. File **Form W-7 (Application for IRS Individual Identification Number)** with: - Proof of identity (passport) - Proof of Canadian residency Processing takes 4–6 weeks. Once issued, your ITIN is permanent and used on all future US tax filings. ### File Form 1040-NR (US Non-Resident Alien Income Tax Return) Non-residents file the **1040-NR**, not the standard 1040. This form is due **June 15, 2026 for 2025 income** (non-residents get an extra 60 days). On the 1040-NR, you will report: - Schedule E (Supplemental Income or Loss) — your rental income and expenses - All deductions applicable to US real estate (see below) ### Elect Section 871(d) Treatment (Critical) Here's where tax planning matters. By default, the IRS applies a 30% withholding rate to gross rental income. **Section 871(d) election lets you report net rental income instead and pay tax only on profit.** To make this election: - File **Form 8288-B (Statement of Withholding on Dispositions by Foreign Persons)** with your 1040-NR - Attach a statement titled "Section 871(d) Election" - List all US real property and declare you elect to treat it as US-business income **Why elect 871(d)?** Compare: - **No election (30% on gross):** USD $10,000 rental income × 30% = USD $3,000 tax - **With 871(d) (tax on net):** USD $10,000 income minus USD $7,000 expenses = USD $3,000 net × 21% federal = USD $630 tax This election saves thousands annually on properties with substantial expenses. ### Deductible US Rental Expenses On Schedule E, claim: - Mortgage interest (not principal) - Real estate property tax - Insurance - HOA fees (if applicable) - Utilities and maintenance - Property management fees - Repairs (capital improvements are depreciated, not deducted) - Travel to/from the property (if ordinary and necessary for management) **Depreciation:** The building (not land) can be depreciated over 27.5 years. This reduces taxable US income further. However, depreciation triggers "recapture tax" (25%) when you sell. ## Rhode Island State Tax Obligations Rhode Island requires all non-residents with RI-source income to file a state return, even if federal tax is zero. ### File RI Form RI-1040 (Non-Resident) File annually by **April 15, 2026 for 2025 income.** Report: - Federal adjusted gross income (from your 1040-NR, Schedule E) - RI tax rate: **5.99%** on net rental income - Property tax paid (credit eligible on certain forms) Rhode Island taxes net income, not gross. If your 871(d) election reduces federal net taxable income, it also reduces RI taxable income proportionally. ### Estimate Payments If RI tax owing exceeds USD $500, make quarterly estimated payments on: - June 15, 2025 - September 15, 2025 - January 15, 2026 - April 15, 2026 **Combined example (RI + federal 871(d)):** - Net rental profit: USD $3,000 - Federal tax at 21%: USD $630 - RI tax at 5.99%: USD $180 - Total: USD $810 (compared to USD $3,000 without 871(d)) ## Selling Your Rhode Island Property: FIRPTA Withholding If you sell the RI property, both the IRS and Rhode Island have special withholding rules for foreign persons. ### Federal FIRPTA Withholding **Form 8288 (U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests)** is filed by the buyer or buyer's agent (not you). However, understand: - Sale price × 15% is withheld by the buyer and remitted to the IRS - You receive Form 8288-B (withholding statement) to use on your final return - File your final 1040-NR to claim a refund if withholding exceeds tax owing Capital gains tax in the US is 20% long-term + 3.8% net investment income tax, so the 15% FIRPTA withholding is a prepayment. ### Rhode Island FIRPTA Rhode Island also has withholding: 5% of sale proceeds. The buyer's closing agent withholds and remits to RI. Claim this on your final RI-1040 as a prepayment. ### Canadian Reporting Report the sale on your Canadian return: - Use the 1.36 exchange rate for the sale price and cost basis (use the rate from the year of purchase and year of sale, as applicable) - Calculate the capital gain/loss in CAD - Report on Form T776 and Schedule 3 (Capital Gains) - Capital gains tax applies at 50% inclusion rate in Canada