New Brunswick Landlord with Maryland Rental Property

## Cross-Border US Rental Property Taxation: A New Brunswick Landlord's Guide As a New Brunswick resident who owns rental property in Maryland, you live in one country, work in another, and report income to two tax authorities. This creates a dual-filing obligation that, if mismanaged, can result in significant penalties and double taxation. This guide walks you through your Canadian and US tax responsibilities, the forms you'll need, and the deadlines that matter. ## Why New Brunswick + Maryland Creates Complexity Maryland residents pay state income tax on all income, including that earned by non-residents who own Maryland property. As a Canadian resident, you don't qualify for Maryland resident treatment, so Maryland considers you a non-resident landlord. This triggers: - **US federal income tax** on your net rental income - **Maryland state income tax** on your gross rental income at 5.75% - **Canadian federal and provincial tax** on worldwide income (including the Maryland rental) - **Part XIII withholding** from Canada if you don't file the right forms - **US withholding** on rents if you don't make a valid election The key to managing this is understanding that Canada taxes on a net basis (revenue minus deductible expenses) while the US default approach taxes on a gross basis—unless you make an election to be taxed on net income instead. ## Your Canadian Tax Obligations ### Filing the T776 (Rental Income Form) You must report all rental income from Maryland property on your annual Canadian tax return. The **Canada Revenue Agency (CRA)** requires you to file **Form T776: Statement of Real Estate Rentals** with your personal tax return. On the T776, report: - **Gross rents received** in Canadian dollars - **Deductible expenses** (mortgage interest, property tax, insurance, repairs, utilities you pay, property management fees, advertising, accounting) - **Net rental income or loss** Convert all USD amounts to CAD using the Bank of Canada's annual average exchange rate. For the 2024 tax year (filed in 2025), the CRA typically uses the prior year's average rate. Use **1 USD = 1.36 CAD** for 2024 income. ### Form T1135: Foreign Property Reporting If the fair market value of your Maryland property exceeds **CAD $100,000** at any point during the tax year, you must file **Form T1135: Foreign Income Verification Statement**. This form simply tells CRA that you own foreign property. Failure to file can result in a **$2,500 penalty per year**. ### Part XIII Withholding Here's where many Canadian landlords get caught off guard. If you don't file the correct form with the CRA, the **US tenant's employer or the property tenant may be required to withhold 25% of gross rents** and send it to the CRA under Part XIII withholding rules. This is effectively a security deposit against your Canadian tax liability. **To avoid Part XIII withholding, file Form NR6 (Non-Resident Withholding Tax Exemption Certificate)** with the CRA before rents are paid. This form certifies that you'll file a Canadian tax return and pay any tax owing. Once issued, the 25% withholding is waived. ### Foreign Tax Credit (FTC) You cannot pay tax twice on the same income. Canada allows a **foreign tax credit** for income tax paid to the US. On your Canadian return (Schedule 1), claim the US federal and Maryland state income tax you actually paid as a credit against your Canadian tax. **How to calculate:** Determine your US tax liability (federal + Maryland state), convert to CAD, and claim on line 40600 of your Canadian return. --- ## Your US Federal Tax Obligations ### Obtain an ITIN You cannot use your Canadian Social Insurance Number (SIN) to file US tax returns. You need an **Individual Taxpayer Identification Number (ITIN)**. Apply using **Form W-7: Application for IRS Individual Identification Number**. Processing takes 6–12 weeks. Once obtained, use this ITIN on all US tax filings. ### File Form 1040-NR (Non-Resident Alien Return) Non-resident aliens with US-source rental income must file **Form 1040-NR: Non-Resident Alien Income Tax Return**. This return is filed with the IRS (not state), but Maryland requires a corresponding state return (see next section). On Form 1040-NR: - Report gross rental income on **line 5 (rental real estate, royalties, partnerships, S corporations, and trusts income)** - Report deductible expenses on **Schedule E (Part I: Rental Real Estate Income and Loss)** - Calculate net rental income - Apply the **Section 871(d) election** (see below) ### Schedule E: Deductible Rental Expenses Complete **Schedule E (Form 1040)** to detail your expenses: - Mortgage interest - Property tax - Insurance - Repairs and maintenance - Utilities - Advertising (if applicable) - Property management fees - Depreciation (if you elect cost recovery) Do **not** claim the standard deduction (non-residents cannot). You'll be taxed on your net rental income after these expenses. ### Section 871(d) Election (Critical) The **default US rule withholds 30% of gross rents** on non-resident rental income. This is severe and is meant to be temporary security. To avoid this, file an **election under Section 871(d)** on your Form 1040-NR. This election allows you to be taxed on **net rental income** (after deductions) instead of gross rents, and reduces your withholding to approximately 15% federal (or less, depending on your actual tax liability). **How to make the election:** Attach a statement to your 1040-NR (or include in your return) stating: *"The taxpayer elects under IRC Section 871(d) to be taxed on net income from real property located in the United States."* Once filed, your property is treated as "effectively connected income" (ECI), and you benefit from the full deduction of expenses. ### Filing Deadline and ITIN Numbers File Form 1040-NR by **June 15, 2025** for the 2024 tax year (non-residents get a later deadline than US citizens). If you need to request an extension, file **Form 4868**. --- ## Your Maryland State Tax Obligations Maryland imposes a **5.75% state income tax** on all income derived from Maryland sources, regardless of residency. Non-resident landlords must file **Maryland Form 505: Non-Resident Income Tax Return**. ### What You Report on Maryland Form 505 - Gross rents from Maryland property - Deductible expenses (same as your federal return) - Net Maryland taxable income - Calculate tax at 5.75% The Maryland filing deadline is typically **April 15** (same as federal). If you file Form 4868 with the IRS, your Maryland return is also extended to **October 15**. ### Maryland Property Tax On top of income tax, Maryland charges **property tax** on real estate. The average effective rate is **1.09%** of assessed value. This is paid annually to the county assessor (in your case, the Maryland county where the property is located) and is **deductible on both your US and Canadian returns**. --- ## Selling Your Maryland Property: FIRPTA When you eventually sell the property, the **Foreign Investment in Real Property Tax Act (FIRPTA)** requires that **15% of the sale price be withheld** and remitted to the IRS. This is done by the buyer's escrow agent. You'll report the sale on Form 1040-NR in the year of sale, calculate your gain, and any additional tax owed will be offset against the 15% withheld. Plan for this withholding in your cash flow; it's not a prepayment of tax but rather security that you'll file and pay correctly. --- ## Key Dates and Deadlines | Obligation | Form | Deadline (2024 tax year) | To Whom | |---|---|---|---| | Federal US return | 1040-NR | June 15, 2025 | IRS | | Maryland state return | Form 505 | April 15, 2025 | Maryland Comptroller | | Canadian return | T776, T1135 | June 15, 2025 | CRA | | Property tax (Maryland) | County bill | Varies by county | County assessor | | ITIN application (if new) | W-7 | Anytime (6–12 weeks processing) | IRS | --- ## Key Takeaways for New Brunswick Landlords - **File in three places:** Complete T776 and T1135 with the CRA, Form