Tax Implications for Canadians owning a residential rental property in the United States (USA)

by admin
December 23, 2025

In general, property prices are lower in the USA than in Canada. This gives Canadians a better opportunity to invest in the United States. Income tax laws and rules in the USA concerning the taxation of residential rental property differ from those in Canada. The scope of this blog is to highlight only the key taxation rules and laws in the United States. This blog is primarily for a Canadian resident who is not a US resident for tax purposes, and the IRS refers to them as a nonresident alien.

If you want to know more about nonresident aliens, please follow the link below.

Nonresident Alien

Investing in the USA

When a nonresident alien buys a residential rental property in the USA, they can own it in their personal name or through an LLC. To know more about the benefits of owning your real property in an LLC in the USA, please follow the link below.

Owning Your Real Property in an LLC

Apart from the income and growth perspective, you should also consider the state income tax requirements before making a decision. USA income tax includes a Federal Income Tax and a State Income Tax, assessed on separate Federal and State income tax returns, which are also filed separately. Some states do not have a personal/individual income tax. To learn more about the state income tax rates, please follow the links below.

Lowest State Income Tax

When you own a residential rental property in the USA, the income tax act/laws/rules apply to the following income.

Rental Income/Loss from renting
Capital Gain/Loss on sale

Rental Income/Loss from renting

As per Article VI of the Canada-USA tax treaty (most recently amended September 21, 2007), the income from the Real Property may be taxed in the country where the property is situated. In this scenario, you are owning the property in the USA. The taxation of your rental income/loss in the United States gives you two options.

Withholding tax option – As per the publication 515 issued by the IRS, most nonresident aliens are subject to a US tax @30% of the gross income. This withholding rate may be reduced under a provision in the tax treaty. Usually, the tenant or the property manager withholds this tax, deposits it with the IRS, and provides you with a Withholding Certificate. If the tenant fails to withhold, then the landlord becomes responsible for this tax and the filing requirements. The benefit under this method is that you do not have to file an income tax return in the United States on Form 1040NR. You will save on the tax filing burden and fees. It may seem convenient, but there could be several issues with this option.
The above 30% withholding applies to the Gross Rent. What if your net rental income is lower, and when you pay tax on the net rental income (which is gross rent minus expenses, discussed in the below Option b), total income tax payable could be much lower.
As per the Canada-USA tax treaty, taxes paid in the USA can be claimed on your Canadian tax return as a Foreign Tax Credit. But your claim will be limited to the Canadian Income tax payable on the net rental income from your US property. You may not be able to claim the entire amount of US taxes paid.
Under this option, as you are paying tax on the gross rent, you cannot deduct expenses, including depreciation. As per US income tax, you must claim depreciation; otherwise, it will be assumed that you have claimed the allowable depreciation and may have more income tax payable when you realize a capital gain from the sale of the property.
If you have a net rental loss – after deducting expenses, including depreciation, you can carry forward your loss to the following tax year.

File a US Tax Return and pay tax on the net rental income – Under this option, you may choose to file a US Tax Return on Form 1040NR. You will pay tax on your net rental income. Net Rental Income, i.e., Gross Rent minus property tax, mortgage interest, insurance, repairs & maintenance, management fees, utilities, depreciation, and any other allowable expenses. If you end up with a net rental loss, you do not have to pay any income tax. Also, you will be able to carry forward your loss to the following tax years. You will be able to deduct your carried-forward losses from net rental income or capital gains on sale in the following tax years. However, you need to…
You must complete IRS Form W-8ECI and submit it to the withholding agent. This relieves your withholding agent or the tenant from the requirement to withhold 30% tax on the gross rent.
Apply for ITIN – You may need to apply for an Individual Tax Identification Number if you do not have one, which is required when filing your US tax return.
File your US Tax Return on Form 1040NR – and attach a declaration that you are filing this return on a net rental income basis, as this income is effectively connected with a trade or business in the United States. This declaration will apply to all your US rental properties if you have more than one residential rental property.
Pay estimated advance income tax installments – if you estimate that you will be reporting a net rental income in the following tax year, then you need to pay advance income tax installments in the current year.

Capital Gain/Loss on sale

When you sell your US residential rental property, you may have a Capital Gain or a Capital loss. You will report a capital gain if your selling price minus the selling costs exceeds the adjusted cost basis. If your selling price minus the selling costs is lower than the adjusted cost basis, you will report a net capital loss. The depreciation that was allowed or allowable will be recaptured as ordinary income. In the United States, capital gains are taxed differently than in Canada. If you want to learn more, please follow the link below.

Capital Gain Taxation USA

Withholding tax – When you sell your residential rental property in the USA, the buyer is obligated to deduct a 15% withholding tax of the gross sale proceeds at the time of sale unless an exception applies. The IRS may waive or reduce the withholding tax in the following three situations. Situation one – No withholding tax if the selling price is equal to or below $300,000, and the buyer will use the property as a residence. Situation two – 10% withholding tax if the selling price is above $300,000 but below $1 million, and the buyer will use the property as a residence. Situation three – You can apply to the IRS on Form 8288-B to reduce or eliminate the withholding requirement if you expect the tax liability on the capital gain to be lower or nil.
Selling price – you can deduct broker commission and lawyer fee, etc., from your gross sales proceeds before reporting the net capital gain/loss.
Adjusted Cost basis – this includes your purchase costs of the property, plus costs of additions and improvements, minus the allowed or allowable depreciation.
Recapture of depreciation – the amount of allowed or allowable depreciation, if any, will be recaptured and reported as ordinary income.
Net Rental Loss/Losses – if you have a net rental loss in the current year or in prior years, which were carried forward, you can deduct from your above income reported.

A careful long-term tax plan can minimize your current tax liability as well as future taxes when you sell your property with a gain.

This blog was posted in December 2025 primarily focusing on US taxation. If you want to compare the Canada-US taxation only the key points, please follow the link below to visit our blog posted in February 2021.

Real Estate Income -Cross Border Tax

Disclaimer: Information in the post has been presented for a broad and straightforward understanding. This is not a legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situation. You need to contact your accountant or RKB Accounting for further information.