British Columbia Landlord with New Hampshire Rental Property

## US Rental Property Tax Guide for BC Residents Owning in New Hampshire As a British Columbia resident who owns rental property in New Hampshire, you occupy a unique tax position. New Hampshire's absence of state income tax is a significant advantage, but it doesn't eliminate your obligations to either the Canada Revenue Agency (CRA) or the Internal Revenue Service (IRS). Understanding both jurisdictions' requirements is essential to avoid penalties, unexpected withholding, and double taxation. This guide walks you through your Canadian and US federal tax obligations, explains the specific advantages of New Hampshire ownership, and outlines critical deadlines you cannot miss. ## Why BC + New Hampshire Creates Specific Tax Situations As a Canadian resident, you are taxed by the CRA on worldwide income, including US rental property earnings. Simultaneously, the US taxes you as a non-resident alien on US-source rental income. Without proper planning, you could face: - **CRA Part XIII withholding**: Up to 25% of gross rental income withheld at source if you don't file the correct US tax forms - **IRS default withholding**: Up to 30% of gross rental income under Section 1441 if you don't make a Section 871(d) election - **Currency risk**: Income reported in USD but taxed in CAD at CRA rates New Hampshire's lack of state income tax removes one layer of complexity. Unlike owning property in Massachusetts, Connecticut, or New York, you will not face state-level income tax. However, New Hampshire does impose a stiff property tax (average effective rate 2.09%), which reduces your net rental income and creates valuable deductions for CRA purposes. ## Your CRA Obligations ### Filing the T776 (Rental Income Form) You must report all US rental income on your Canadian tax return, regardless of how much US tax you pay. Report your rental income on **Form T776: Statement of Real Estate Rentals**. On the T776: - Convert all US income and expenses to Canadian dollars using the **Bank of Canada annual average exchange rate**. For 2025, use 1 USD = 1.36 CAD for income earned throughout the year (or the specific daily rate for individual transactions, if you prefer consistency). - Include gross rental income before any US tax withholding. - Deduct all allowable expenses: mortgage interest, property tax, insurance, repairs, property management fees, utilities, and depreciation (capital cost allowance or CCA). **Example**: If you collect US$10,000 in annual rent, report CAD$13,600 (10,000 × 1.36). If you paid US$2,090 in property tax, deduct CAD$2,843 (2,090 × 1.36). ### Form T1135 (Foreign Property Reporting) If the cost amount of your New Hampshire property exceeds CAD$100,000, you must file **Form T1135: Foreign Income Verification Statement** with your annual tax return. On the T1135: - Declare the address and legal description of the property. - Report the adjusted cost basis (original purchase price plus capital improvements, converted to CAD). - Report the fair market value at year-end, converted to CAD using the year-end exchange rate. Failure to file the T1135 when required triggers a CRA penalty of CAD$2,500 per year, increasing to CAD$8,000 if the violation continues for two or more consecutive years. This penalty applies regardless of whether you owe tax. ### Part XIII Withholding and the NR6 When you earn rental income, your US tenant (or property manager collecting rent) may be required to withhold 25% of gross rents under **Part XIII of the Canadian Income Tax Act**. This withholding applies to non-residents receiving Canadian-source income. To prevent this withholding, file **Form NR6: Undertaking—Non-Resident Rental Income**. A completed NR6 instructs your US payor (usually a property manager or tenant) that you are not subject to Canadian withholding on US-source income—because US source rental income is outside CRA's withholding jurisdiction. While the NR6 is a Canadian form, it clarifies your status and should be provided to anyone collecting rent on your behalf. ### Foreign Tax Credit (FTC) You may claim a **Foreign Tax Credit** on your Canadian return for US federal income tax paid on rental income. This prevents double taxation on the same income. On your T1 return, calculate your FTC on **Schedule 1** and **Form T2209**. The FTC is generally limited to the lesser of: 1. US tax actually paid on the rental income, or 2. Your Canadian tax rate applied to the foreign income. If you make a Section 871(d) election (see below), you will pay net income tax in the US, and that amount becomes your FTC claim in Canada. ## Your IRS Obligations ### Obtain an ITIN To file a US tax return as a non-resident alien, you must have an **Individual Taxpayer Identification Number (ITIN)**. Apply using **Form W-7: Application for IRS Individual Taxpayer Identification Number**. You can submit this form alongside your first US tax return or separately. Processing typically takes 4–6 weeks. Once issued, your ITIN is permanent and does not expire, even if unused. ### File Form 1040-NR As a non-resident alien with US rental income, file **Form 1040-NR: U.S. Non-Resident Alien Income Tax Return** by **April 15 (or June 15 if filing electronically)** each tax year. On the 1040-NR: - Report US rental income on **Schedule E: Supplemental Income and Loss**, Part II (Rental Real Estate Income). - Deduct mortgage interest, property tax, repairs, utilities, insurance, depreciation, and property management fees. - Report your net rental income or loss. ### Make a Section 871(d) Election By default, the IRS treats non-resident rental income as gross income subject to a flat 30% federal withholding (under Section 1441). This withholding is harsh and inefficient because you lose deductions. Instead, **elect into Section 871(d)**—a provision allowing non-residents to treat rental income as effectively connected with a US business and pay tax on **net income** (after deductions) at graduated US federal tax rates. For 2025, federal rates range from 10% to 37%, depending on net income. **Making the election**: - File Form 1040-NR and fully report net rental income (gross rent minus all deductions). - Attach **Form 8288-B: Statement of Withholding on Dispositions by Foreign Persons**, or simply calculate your net tax due and pay it with your return. - The IRS automatically treats this as an election into Section 871(d) when you file a complete 1040-NR with net income reporting. **Example**: You collect US$10,000 in rent and have US$3,000 in allowable deductions. Under Section 871(d), your taxable income is US$7,000, subject to graduated rates (roughly 10–12% federal, or ~US$840–US$840). Without the election, 30% of US$10,000 (US$3,000) would be withheld immediately, and you'd lose the deduction benefit. ### Form 1098-T: Property Tax Details Your US mortgage servicer will send you **Form 1098: Mortgage Interest Statement** if you paid mortgage interest. Your property tax bill will be a separate invoice from the town assessor in New Hampshire. Neither form is mailed to the IRS automatically, but keep copies for your records. ## The New Hampshire Advantage: No State Income Tax New Hampshire imposes **no state income tax** on residents or non-residents earning income within the state. This saves you a significant layer of taxation compared to owning property in nearby states like Massachusetts (5.0% state tax) or Connecticut (4.5–6.99% state tax). However, New Hampshire's effective property tax rate (2.09% average) is substantially higher than most other states, including British Columbia (approximately 0.5–1.5% across BC municipalities). Expect to pay roughly US$2,090 per US$100,000 in assessed value annually. This high property tax is deductible on both your US 1040-NR and Canadian T776, reducing your net rental income in both jurisdictions. ## Selling the Property: FIRPTA Basics When you eventually sell your New Hampshire rental property, the IRS requires the **Foreign Investment in Real Property Tax Act (FIRPTA)** withholding. **The withholding rule**: Your US buyer must withhold and remit **15% of the gross sale price** to the IRS. For example, if you sell for US$500,000, the buyer withholds US$75