I just bought a rental in Arizona — what do I set up first?
Three things, in this order. Decide how the US rent will be taxed, because leaving it alone means a flat charge on the gross rent with no recognition of expenses, while the alternative is a return computed on net income. Second, set up the records that net computation needs from the first month: the closing statement, the split between land and building, the date the property became available to let, and every expense as it arises. Third, decide how the Canadian side will report the same property, since it runs on its own cost base and its own currency. Doing this at the start costs a fraction of reconstructing it later.
Can I stop the tax being withheld on my rent?
Not by asking the manager to stop. The withholding is what applies when nothing else has been put in place, and it is charged on the gross rent, so a property with a mortgage and ordinary running costs can have tax taken on money it never really earned. The way out is to elect to be taxed on net income and file a US return, which allows the expenses and also requires the building to be written down over time. Your manager needs to know the position you have taken, because their obligation follows from your status rather than from an instruction.
What records will I need for a US rental return?
The purchase and closing documents first, because they fix the cost and let you separate the land from the building. Then the date the property was made available to let, the rent received month by month, and every expense with its invoice: mortgage interest, property taxes, insurance, utilities, management fees, repairs and travel connected to the property. Keep a running schedule showing how the building is being written down, year by year, from the first year onwards. That last item is the one people skip, and it is the one the eventual sale computation depends on.
Does it matter whose name the US property is in?
It decides who files and on what share. Each owner reports their own portion of the rent and the expenses, so a property in two names produces two sets of filings on both sides of the border, and the split should reflect what the purchase documents and the source of the money actually show rather than a round figure chosen afterwards. Sorting this out at purchase is straightforward; changing it later is not, and a mismatch between the ownership on the title and the split used on the returns is the kind of inconsistency that invites questions.
Is it too late to elect net basis if rent has already come in?
Usually not, and it is worth asking rather than assuming. The practical question is how much of the trail can still be assembled: the closing statement, the expenses actually incurred since letting began, and enough to build the write-down schedule from the correct starting date. Where gross withholding has already been taken, filing on a net basis is what brings the expenses into account and recovers the difference between that flat charge and the real liability. Start with the oldest year, because each year's write-down figures depend on the ones before it.
Will depreciation on my US rental cost me when I sell?
Yes, and it is better to know that at the outset. Filing on a net basis makes the write-down of the building part of the computation rather than a choice, so it reduces the US tax while you hold the property and increases the US gain when you sell, because that gain is computed after the write-downs. Canada works out its own gain on its own cost base, so the two figures will not match. None of this is a reason to stay on gross withholding; it is a reason to keep the schedule from the first year, so the sale is arithmetic rather than an excavation.
How do families with assets in two countries handle inheritance?
With paperwork built for both systems rather than one. In practice that means wills that work where each asset actually sits, an executor with authority a foreign bank or land registry will accept, clearance certificates before the estate distributes so the executor is not left personally exposed, and an estate tax exposure calculation done while the person is alive and can still act on it. Doing it afterwards costs more and forecloses most of the options. See cross-border wills and trusts.
Do I pay US tax on an inheritance from abroad?
A bequest is not income, so the receipt itself is not taxed. Reporting is a different matter: a US person who receives large gifts or bequests from a foreign person or estate files an information return for the year, and inheriting a foreign account or an interest in a foreign trust brings the account and asset reports with it. The penalties here attach to the information return, not to tax — which is why people who owed nothing still get letters. See Form 3520.
