Nova Scotia Landlord with Florida Rental Property

## US Rental Income as a Nova Scotia Resident: Your Complete Tax Guide Owning rental property in Florida as a Nova Scotia resident creates a unique tax situation. You're subject to Canadian income tax on worldwide income, US federal income tax on US-sourced rental income, and Florida property tax—but you'll benefit from Florida's lack of state income tax. Understanding both tax systems and how they interact will help you optimize your position and avoid costly mistakes. This guide walks you through your obligations to the Canada Revenue Agency (CRA), the Internal Revenue Service (IRS), and Florida authorities, plus strategies to minimize double taxation. --- ## Why Florida Rental Property Is Attractive to Canadian Landlords Florida has no state income tax, making it one of the most tax-efficient US states for Canadian property owners. While you'll still owe Canadian federal and provincial tax plus US federal tax, you avoid the additional layer of state income tax that landlords in New York, California, or Texas must pay. Florida's effective property tax rate averages 0.89%—lower than most Canadian provinces—and you'll benefit from homestead exemptions if you occupy the property as a primary residence (though this won't apply to pure rental properties). The real advantage: Florida allows you to elect into Section 871(d) of the US Internal Revenue Code, which lets you be taxed on *net* rental income rather than *gross* rental income at a default 30% rate. This election is critical and often underused by Canadian landlords. --- ## Canada Revenue Agency Obligations ### Filing Requirements As a Canadian resident, you must report all worldwide income to the CRA, including US rental income converted to Canadian dollars. **Form T776 (Statement of Real Estate Rental Income)** - File this form annually if you earn any rental income. - Report gross rents, deductible expenses (mortgage interest, property taxes, insurance, repairs, property management fees), and net rental income. - Expenses must be reasonable and directly tied to earning rental income. - Capital improvements (roof replacement, structural upgrades) are *not* deductible in the year incurred; depreciation (CCA) applies instead. **Currency Conversion** - Convert all US rental income and expenses to Canadian dollars using the Bank of Canada annual average exchange rate for the tax year. - For 2025, use 1 USD = 1.36 CAD as your conversion rate unless you have a more recent official rate. - Keep detailed records of exchange rates used. ### Form T1135 (Foreign Property Return) If the fair market value of your Florida rental property exceeds CAD $100,000, you must file Form T1135 by June 15 in the year following the tax year. - Report the cost basis and fair market value of your property in Canadian dollars. - Provide a description and location of the property. - Penalty for late filing: CAD $25 per day, up to CAD $2,500. ### Foreign Tax Credit (FTC) This is your primary tool to avoid double taxation. - You'll pay US federal income tax on your Florida rental income. - You'll also owe Canadian tax on that same income. - Claim a non-business FTC on Schedule 1 (Form 1040 in the US; Form T1) to reduce Canadian tax by the US tax you've already paid. - The FTC is limited to the lesser of: (a) US tax paid, or (b) Canadian tax attributable to that US-source income. If you overpay one jurisdiction, you may carry back unused credits one year or forward indefinitely. --- ## IRS Obligations for US Rental Income ### Obtaining an ITIN You cannot use your Canadian Social Insurance Number (SIN) with the IRS. You must apply for an Individual Taxpayer Identification Number (ITIN). **Form W-7** - File this with the IRS to request an ITIN. - You can file Form W-7 with your first US tax return or separately beforehand. - Processing typically takes 4–6 weeks. - Your ITIN will be issued in lieu of a Social Security Number for US tax purposes only. ### Form 1040-NR (Non-Resident Alien Income Tax Return) File this form annually to report your US rental income and claim deductions. **Key points:** - Due date: June 15, 2025 for the 2024 tax year (automatic extension to October 15, 2025 if requested). - Use Schedule E to report rental income and expenses. - Report gross rents, then deductible expenses. - You cannot claim the standard deduction as a non-resident alien; you must itemize or claim net deductions related to rental activity. ### Schedule E (Supplemental Income Schedule) On Schedule E, report: - Gross rental income - Deductible expenses: - Mortgage interest (not principal) - Property taxes - Insurance - Repairs and maintenance - Utilities and management fees - HOA fees (if applicable) - Depreciation (MACRS, typically 27.5 years for residential rental property) - Net rental income or loss ### Section 871(d) Election (Critical) **Without this election:** A 30% withholding tax applies to your gross rental income. This is punitive because you pay tax on income before expenses. **With this election:** You're taxed like a US citizen on *net* rental income at graduated tax rates (10%, 12%, 22%, etc., depending on income level). This is almost always more favorable. **Form 8288-B (Application for Extension of Time to File)** - File Form 8288-B with the IRS to make a Section 871(d) election. - File it with your Form 1040-NR for the tax year. - Once elected, the election remains in effect for all subsequent years unless you revoke it. - The election applies to all your US real property income. *Example:* If you earn USD $15,000 gross rental income and have USD $8,000 in expenses: - Without election: 30% × $15,000 = $4,500 tax - With election: ~12% × $7,000 net = $840 tax (approximate; actual rate depends on total income) --- ## Part XIII Withholding (CRA) If your US rental income is paid by a tenant or property manager in the US, the CRA does not apply Part XIII withholding (this applies to flows from Canada to non-resident non-citizens). However, if rental payments are remitted to a Canadian bank or management company, ensure they do not incorrectly apply 25% withholding. File **Form NR6 (Undertaking to File Form 1040-NR)** with your Canadian financial institution to confirm you're filing a US tax return and reduce unnecessary withholding. --- ## Florida Property Tax and No State Income Tax **Property Tax** - Florida taxes real property at an average effective rate of 0.89%. - Taxes are due November 30; penalties accrue after November 30. - Pay property tax directly to the Florida County Tax Collector or through your mortgage servicer's escrow account. - Property tax is deductible on Form 1040-NR Schedule E. **No State Income Tax** - Florida imposes no state income tax on individuals. - This means you avoid an additional 3–10% tax that residents of other states would owe. - Your total tax burden is limited to Canadian federal/provincial tax plus US federal tax, offset by the foreign tax credit. --- ## Selling Your Florida Property: FIRPTA Basics If you sell your Florida rental property, you'll trigger US capital gains tax. Non-resident aliens are subject to FIRPTA (Foreign Investment in Real Property Tax Act). **Key points:** - You must report the sale on Form 1040-NR. - Calculate gain as: sale price minus adjusted basis (cost plus improvements, minus depreciation). - Long-term capital gains (held >1 year): taxed at 15% or 20% federally. - The IRS may require the buyer to withhold 15% of the gross sales price (FIRPTA withholding); this withholding applies against your final tax liability. - File Form 8288 (U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests) if required. - In Canada, report the gain on Schedule 3 (Capital Gains) of your personal tax return. Use your FTC to offset Canadian tax with US tax paid. --- ## Key Deadlines: CRA and IRS | Deadline | Form | Agency | Notes | |----------|------|--------|-------| | June 15, 2025 | Form 1040-NR | IRS | US tax return for 2024 tax year | | October 15, 2025 | Form