I have a dual-citizen client who owns a rental house in the states. Per her US preparer, all rental income and expenses are entered on her Canadian return and her US preparer then files a $0 return 1040 in the US for her. She and her husband are now planning to refinance the rental property for an equity withdrawal, which will add him as co-owner.
Her husband is Canadian citizen who has only visited the US on short vacations. They have no intention of ever moving to the US. His involvement will be in name only to facilitate this refinance. If he becomes a co-owner of the rental house:
What impact would that have on him in regard to US taxation and reporting? (I think none)
Would he also have to file some sort of return in the US every year? (I don’t think so)
On the Canadian side, my assumptions are (please correct me if any of these aren’t necessary because they would still prefer to leave everything on her Canadian return if possible):
They would have to split the rental income on their Canadian returns every year.
He would also have to report the foreign property ownership.
He would have a share of the Canadian tax burden if they ever sell.
They understand and aren’t concerned about things on the Canadian side. Just what the potential US/IRS exposure is for him.
I will admit that I don’t know very much about US taxation. I do have a corporate client with a property in Florida which he rents out for part of the year. He is most definitely required to not only file state & federal tax corporate returns, but pay tax on rental income profits.
It is likely different for various states, but Florida grabs 30% of his net profit. It may be different for personal tax returns, but I would suggest caution. It may be advisable to put a clause in your engagement letter for this client that indicates that you are accepting her and her US preparer’s statement of facts as related to this situation and proceeding on that basis.
I suspect what the tax preparer means is that the taxpayer doesn’t have any other US sourced income and the rental property has a net loss so all US taxes are covered by foreign tax credits - thus the return will have $0 owing on it. The taxpayer still has to report the rental income and expenses on her 1040 along with her other worldwide income. The major problem with this scenario is that the taxpayer would likely be subject to expensive US gift taxes if she just “gave” him half of the property. Her husband if he became a part owner would have to file a non-resident 1040NR to report his rental income/loss every year even if it is a loss. Your assumptions regarding the Canadian treatment are essentially correct. Except that on the Canadian side you could argue that since it is an in name only transfer that it is still hers for tax purposes if not legal purposes. If you ended up owing taxes on either rental income along the way or on the final sale of the property this could come back to haunt you however as the taxes paid on his US return can not be claimed as foreign taxes on her Cnd return. You need to go back to the US preparer and if they don’t tell you all this and in more detail (gifting rules are complicated) then she needs another US tax preparer that deals with cross border couples more often. This has the potential to be extremely messy and expensive if not done correctly. You might be able to get him to co-sign the loan without being on title at which point the property is still hers legally and for tax purposes on both sides of the border.
Thank you! The house is in Iowa. I hadn’t thought about it being considered a gift. The only reason he isn’t on the title is they never bothered. It was her home before the marriage (2009). I do know that his name will be put on the title and loan. Her income isn’t enough to qualify for the new mortgage.
It doesn’t operate at a loss. It is a self-sufficient property that makes $100 or so a month unless there are major maintenance projects.
She has had US income in the past, but now this property is the only US source income.