Nova Scotia Landlord with New Hampshire Rental Property

## US Rental Property Ownership as a Nova Scotia Resident: Tax Guide for New Hampshire Landlords Owning rental property across the Canada–US border presents unique tax opportunities and obligations. If you're a Nova Scotia resident with rental property in New Hampshire, you operate in one of the most tax-efficient jurisdictions in the United States—New Hampshire has no state income tax—but you must satisfy both Canadian Revenue Agency (CRA) and Internal Revenue Service (IRS) requirements. This guide explains your exact obligations and the forms you must file. ## Why Nova Scotia–New Hampshire Creates a Special Tax Situation New Hampshire's absence of state income tax is a significant advantage, but it doesn't eliminate your tax burden. Here's why this combination matters: - **No NH state income tax**: Unlike most US states, New Hampshire imposes no income tax on rental income. This eliminates a second layer of tax you'd face in states like Massachusetts or Connecticut. - **Canadian residency requires worldwide reporting**: As a Nova Scotia resident, you must report all worldwide income to the CRA, including US rental income, at Canadian tax rates. - **Dual filing is mandatory**: You're required to file both with the IRS (US federal) and CRA (Canadian federal and provincial). - **Exchange rate impacts**: Rent collected in USD must be converted to CAD on your Canadian return using Bank of Canada rates. In 2025, the average rate is 1 USD = 1.36 CAD, though you use the rate applicable on the date of receipt. This creates a practical reality: your New Hampshire property will be taxed by Canada (where you reside) but not by New Hampshire (where the property sits). Managing withholding and foreign tax credits is essential to avoid overpaying. ## CRA Obligations: Reporting Your US Rental Income ### Form T776 (Rental Income) You must file Form T776 with your Canadian personal income tax return every year you own the New Hampshire property and generate income. This form reports: - Gross rental income (in CAD, converted from USD) - Operating expenses (utilities, property tax, insurance, maintenance, advertising) - Mortgage interest (if applicable) - Capital cost allowance (CCA), if you claim depreciation **Key point**: Include *only* the actual rent collected, not revenue excluded by withholding. If you collect USD 10,000 in annual rent but USD 3,000 is withheld by the IRS, you report the full USD 10,000 (converted to CAD) on T776, then claim a foreign tax credit for the withheld amount. ### Form T1135 (Foreign Property) If the fair market value of your New Hampshire property exceeds CAD 100,000 at any time during the tax year, you must file Form T1135. Most New Hampshire residential properties exceed this threshold. - Report the property's address and estimated fair market value in CAD - This is an information form—it doesn't assess tax but is mandatory for CRA compliance - File it with your T1 return annually while you own the property ### Foreign Tax Credit (FTC) Canada allows a foreign tax credit to prevent double taxation. This is how it works: 1. You pay US federal withholding on your rental income (either 30% on gross under default rules, or a lower rate if you file Form 8288-B under Section 871(d)). 2. You report this US tax paid on Form T776 and Schedule 1 of your Canadian return. 3. CRA credits this amount against your Canadian tax liability on the same income. **Calculation example** (using 2025 exchange rate of 1.36): - Gross annual rent: USD 12,000 (CAD 16,320) - US withholding at 15% (via Section 871(d) election): USD 1,800 (CAD 2,448) - You report CAD 16,320 as income on T776 - You claim CAD 2,448 foreign tax credit on Schedule 1 - Your net Canadian tax is calculated on CAD 16,320 at your marginal rate, reduced by the FTC **Important caveat**: The FTC cannot exceed your Canadian tax owing on the foreign income. If your US tax withheld exceeds this amount, you may not recover the excess through the FTC mechanism alone. ## IRS Obligations: Filing as a Nonresident Alien ### Obtain an ITIN Before filing with the IRS, you need an Individual Taxpayer Identification Number (ITIN). As a Canadian resident, you cannot use a Social Security Number (SSN). - Apply using Form W-7 with supporting documentation (passport, utility bill) - Process time: 2–4 weeks - The ITIN is required to file Form 1040-NR and to make a Section 871(d) election - Cost: Free ### Form 1040-NR (Nonresident Alien Tax Return) You must file Form 1040-NR with the IRS if you have US-source rental income. File by **June 15** (extended deadline for nonresidents; the regular deadline is April 15, but nonresidents typically receive an automatic two-month extension). Key parts of Form 1040-NR: - Report rental income on Schedule E (Supplemental Income and Loss) - Claim deductions for operating expenses and mortgage interest - Claim deductions for property tax paid to New Hampshire (even though NH doesn't tax income, local property tax is deductible against federal income) ### Schedule E (Supplemental Income and Loss) List your New Hampshire property details: - Address and description (rental house, condo, etc.) - Months rented - Rent received (in USD) - Operating expenses (itemized) - Net rental income or loss The net figure flows to Form 1040-NR line 17. ### Section 871(d) Election: The Critical Optimization **This is the most important US strategy for cross-border landlords.** Under Section 871(d) of the US Internal Revenue Code, you can elect to be taxed as if you were a US resident on your rental income. This sounds counterintuitive, but it's beneficial because: 1. It lowers your withholding rate from 30% (default for nonresident aliens) to 15% (the tax rate on net income after deductions). 2. It allows you to claim all rental deductions (expenses, mortgage interest, depreciation) against gross income. 3. It aligns your US and Canadian reporting, simplifying the foreign tax credit. **How to make the election**: - Check box (d) on Form 1040-NR - Attach a statement to your Form 1040-NR indicating you're making the Section 871(d) election - File Form 1040-NR by June 15 **Withholding consequence**: - Your property manager or tenant payor must withhold 15% of gross rent (not 30%) - File Form 8288-B with the IRS to notify them of the reduced withholding rate - Provide Form 8288-B to your payer (property manager) so they withhold correctly ## The New Hampshire Advantage: No State Income Tax New Hampshire's tax climate provides a meaningful advantage that most neighboring states don't offer: - **Zero state income tax**: Your net rental income is not subject to New Hampshire state income tax. - **No local income tax alternatives**: Unlike some states, NH also has no local income tax or replacement gross income tax on rental activity. - **Property tax is the only NH tax**: New Hampshire's effective property tax rate averages 2.09%, one of the higher rates in the US, but property tax is deductible against your federal US income (and can be included in calculating your Canadian foreign tax credit on a pro-rata basis). **Comparison**: If this property were in Massachusetts (which has 5% state income tax on rental income), you'd owe federal + state tax in the US, plus Canadian tax. New Hampshire eliminates one layer entirely. However, do not conflate "no state income tax" with "no tax burden." You still owe US federal income tax and Canadian tax. The NH advantage is meaningful but not absolute. ## Selling the Property: FIRPTA When you eventually sell, US federal tax rules apply. The Foreign Investment in Real Property Tax Act (FIRPTA) requires: - The buyer must withhold 15% of the sale price (on residential property valued below USD 1 million) - This withholding is creditable against your US capital gains tax on Form 1040-NR - You must report the capital gain (sale price minus adjusted basis) on Form 1040-NR, Schedule D - The capital gain is also reported to the CRA on Schedule 3 and subject to Canadian tax **Planning note**: FIRPTA withholding is not final tax—it's a prepayment. Your actual capital gains tax is calculated based on your cost basis, depreciation recapture