Non-US Residents Don’t Have to Pay Income Tax on Stateside Vacation Homes

Foreign national mortgage

It’s considered perfectly legal for foreign nationals to own real estate in the U.S. If you’re looking for Canadian financing for a vacation home in the States, one of the biggest recurring questions potential investors have is about how it will impact their taxes. More specifically, they want to know if they will need to file taxes in the United States. The answer is: “It depends.”
If I buy a vacation property in the United States, do I need to pay income taxes there?
Generally, non-U.S. residents aren’t required to file an American income tax return unless they’ve begun generating income somehow connected to a business within the country, or if they become an employee of a U.S. resident company. Another scenario that might require a U.S. income tax return is if they have disposed of property situated within the U.S. Canadian individuals are considered non-residents of the country if they’re not U.S. citizens or green card holders. Additionally, they must spend less than 120 days a year in America. Therefore, non-residents don’t need to file an income tax return in the States if they buy a vacation property there and keep it for personal use only.
Does that change if I rent out my U.S. property?
If a Canadian property owner rents out their U.S. vacation home for 15 days or more, then they’re supposed to file a income tax return to report the rental activity in the United States. Non-resident owners are supposed to pay 30% of rental income (gross numbers) they may have received as what’s called “withholding tax.” Many non-residents will normally hire a domestic agent to collect rental income and file the withholding tax with the IRS on their behalf. If handled appropriately, the non-resident should have no further income tax filing requirements with the American government.
Cases exist, however, where significant rental expenses may render the 30% tax obligation an unfair difficulty. Thankfully, the IRS has concessions in place allowing non-resident property owners to declare something called a “net rental election,” which results in a slightly graduated tax rate instead of the flat 30%. Mainly all that’s required are a few additional tax forms.
Canadian financing for commercial properties makes the equation more complicated, but anyone involved with foreign national mortgage lenders and loans can better explain to you the ins and outs involved.
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