Canadians Renting Out U.S. Property: 1040-NR and the 871(d) Election

Many Canadians buy a condo in Florida, a cabin near a U.S. lake, or a rental unit in a Sunbelt city and assume the U.S. tax side is an afterthought. It is not. The moment a Canadian collects rent on U.S. real estate, the United States asserts a primary right to tax that income, and the default mechanism is harsh. Understanding how the U.S. taxes a non-resident's rental income — and how the Internal Revenue Code section 871(d) election changes the math — is the difference between handing the IRS 30% of your gross rents and paying a modest amount, or often nothing, on your net rental profit.

Why U.S. rental income matters for Canadians

U.S. real property produces what the U.S. calls U.S.-source income, and the United States taxes non-residents on that income regardless of where the owner lives. For a Canadian landlord this creates a two-country problem: the U.S. taxes the rents as the country where the property sits, and Canada taxes the same rents because Canadian residents are taxed on their worldwide income. Both countries are entitled to tax, and the burden falls on the taxpayer to use the available elections and credits so the same dollar is not taxed twice. Getting the U.S. filing wrong is also expensive in a second way: a missed election can lock in the 30% gross tax, and a missed Form 1040-NR deadline can forfeit the deductions that make the election worthwhile.

The default U.S. rule: 30% on gross rents

Under U.S. law, rent paid to a non-resident alien is treated as FDAP income (fixed, determinable, annual, or periodical income) when it is not connected to a U.S. trade or business. FDAP income is taxed at a flat 30% rate on the gross amount under IRC section 871(a), and the tax is collected by withholding at source under IRC section 1441. The IRS states the rule plainly: income from U.S. real property owned by a non-resident alien "is taxed at a 30% (or lower treaty rate) if it is not effectively connected with a U.S. trade or business."

Two features of this default rule sting. First, the tax is on gross rent — there is no deduction for mortgage interest, property taxes, insurance, condo or HOA fees, repairs, management commissions, or depreciation. A property that loses money in economic terms can still generate a real U.S. tax bill. Second, the obligation to withhold and remit the 30% falls on the withholding agent — typically the tenant or the U.S. property manager who collects the rent. A property manager who fails to withhold can be held personally liable for the tax, which is why many managers either withhold the full 30% or insist on proper paperwork before releasing rent to a foreign owner.

The fix: the IRC section 871(d) net election

The Code provides a deliberate escape from gross taxation. Under IRC section 871(d), a non-resident who holds U.S. real property for the production of income may elect to treat that income as effectively connected with a U.S. trade or business (ECI). The effect of the election is transformative: instead of 30% on gross rent, the owner is taxed on net rental income at the graduated rates that apply to U.S. individuals, and is allowed to deduct the ordinary and necessary expenses of operating the property.

Allowable deductions generally include mortgage interest, real property taxes, insurance, repairs and maintenance, property management fees, condo or HOA dues, utilities the owner pays, and — importantly — depreciation. U.S. residential rental buildings are depreciated on a straight-line basis over 27.5 years (commercial property over 39 years), and depreciation is not optional once the property is in service. Because of depreciation and interest, many leveraged rentals show little or no taxable net income in their early years, so the section 871(d) election frequently reduces the U.S. tax to a small fraction of what gross withholding would have taken — sometimes to nil.

The election is made by attaching a statement to a timely filed Form 1040-NR for the first year it applies, identifying the property and electing under section 871(d). Once made, the election applies to all U.S. real property income and continues for every later year until it is revoked, so it is not something you flip on and off year to year to chase the better result. The election can generally be revoked by filing Form 1040-X within the statute of limitations (broadly three years from when the return was filed or two years from when the tax was paid, whichever is later); once that window has closed for the year of election, the election can be revoked for later years only with IRS consent. There is also a critical filing trap: to actually claim deductions and credits on Form 1040-NR, the return must generally be filed within 16 months of its original due date. File too late and the IRS can deny every deduction and tax you on gross rents anyway, even though the election was available.

Stopping the withholding at source: Form W-8ECI

Making the election on your tax return solves the year-end calculation, but it does not, by itself, stop a property manager from withholding 30% throughout the year. To turn off gross withholding, the owner gives the withholding agent a Form W-8ECI, on which the owner certifies under penalty of perjury that the rental income is effectively connected with a U.S. trade or business and will be reported on a U.S. return. With a valid Form W-8ECI on file, the manager may release the rent without the 30% deduction, and the owner squares up the actual net tax on Form 1040-NR. The W-8ECI is generally required in the first year of the election and renewed as the form's validity period requires.

You will need an ITIN

To file Form 1040-NR a Canadian needs a U.S. taxpayer identification number. Because most Canadians are not eligible for a Social Security number, that means an Individual Taxpayer Identification Number (ITIN), applied for on Form W-7. Rental filers typically apply under the W-7 reason for a non-resident filing a U.S. federal return, and the W-7 is usually submitted together with the first Form 1040-NR or through an IRS Certifying Acceptance Agent so the original passport does not have to be mailed to the IRS. Building in time to obtain the ITIN before deadlines is part of doing this properly; a missing ITIN can delay or invalidate the very filing that carries the election.

How the Canada-U.S. treaty interacts

Canadians often hope the Canada-United States tax treaty will knock the 30% rate down the way it caps tax on cross-border dividends or interest. It does not work that way for real property. Under Article VI of the treaty, income from real property may be taxed in full by the country where the property is located, so the United States keeps its primary right to tax U.S. rents at domestic rates. The treaty does not impose a reduced rental rate; the relief from the punishing 30% gross tax comes from U.S. domestic law — the section 871(d) net election — not from a treaty article.

The treaty does, however, prevent true double taxation on the back end. Canada taxes the same U.S. rental income because the owner is a Canadian resident, but under Article XXIV Canada provides a foreign tax credit for the U.S. tax properly paid on that income. The credit is calculated on the Canadian return and is limited to the Canadian tax otherwise payable on the foreign income. On the Canadian side the rental is reported in Canadian dollars with Canadian-rule deductions, including capital cost allowance if claimed, so the two countries' net figures rarely match exactly — careful coordination is what keeps the foreign tax credit from leaving tax on the table. Notably, Canada itself has a mirror-image regime for non-residents earning Canadian rents under section 216 of the Income Tax Act, which is the same idea in reverse and is explained in our guide on the section 216 election for non-resident rental income.

Don't forget state tax

Federal tax is only part of the picture. Most U.S. states impose their own income tax on rental income earned from property within the state, with their own returns, rates, and rules — and a few require their own withholding from non-resident owners. Florida is a common exception, with no state personal income tax on individuals, which is one reason many Canadians who rent out Sunbelt property find the Florida picture simpler than, say, a rental in California or New York. The state analysis has to be run property by property; the federal section 871(d) election does not control what a state does.

FIRPTA: the tax that arrives when you sell

The rental years are only the first chapter. When a Canadian eventually sells U.S. real estate, the Foreign Investment in Real Property Tax Act (FIRPTA) requires the buyer to withhold a percentage of the gross sale price — not the gain — and remit it to the IRS on Form 8288. The general FIRPTA withholding rate is 15% of the sale price. A reduced 10% rate can apply where the buyer is an individual who will use the property as a residence and the price is between US$300,000 and US$1,000,000, and a personal-residence buyer may be able to forgo withholding entirely where the price is US$300,000 or less and certain conditions are met.

FIRPTA withholding is frequently far larger than the actual U.S. tax on the gain, because it is computed on the whole price rather than the profit. A seller can apply for a withholding certificate on Form 8288-B to reduce the amount withheld to the expected tax, but the application generally must be filed with the IRS at or before closing — practically, you want it in well ahead of time — and the funds are held until the IRS responds. One more sting for landlords specifically: the depreciation you were required to claim during the rental years is generally recaptured as income on sale, which raises the U.S. tax on the disposition. FIRPTA mechanics are involved enough that we cover them separately in our overview of FIRPTA withholding for Canadian sellers.

Common traps

The recurring problems we see with Canadian U.S.-rental owners are predictable and avoidable:

• Never filing at all. Some owners assume that because no U.S. tax was withheld, or because the rental loses money, there is nothing to file. The IRS has run compliance campaigns aimed precisely at non-residents with U.S. rental property who never filed — and without a filed return the deductions are lost and the 30% gross exposure remains.
• Missing the 16-month deadline. Filing late enough can forfeit every deduction, converting a break-even rental into a gross-tax liability.
• No Form W-8ECI on file. Without it, the property manager keeps withholding 30%, tying up cash flow until a refund is claimed.
• Ignoring depreciation. Depreciation is not optional; failing to claim it does not avoid recapture on sale, so the owner can be taxed on depreciation they never benefited from.
• Forgetting the Canadian and state filings. The U.S. return is one of three or four filings, and skipping the Canadian foreign tax credit or a required state return undoes the planning.
• Mismatched ownership structures. Holding U.S. rental real estate through a corporation, partnership, or trust changes the analysis entirely and can create U.S. estate tax and double-tax problems; the right structure should be chosen before purchase, not patched afterward.

How Barrett Tax Law approaches U.S. rental income

Our cross-border practice is led by Simone Barrett, who is admitted in Ontario and Florida, so the U.S. and Canadian sides of a Canadian-owned U.S. rental are handled together rather than in isolation. We start by mapping your situation — where the property is, how it is owned, whether withholding is already happening, and whether prior years were filed — and then we make and document the section 871(d) election, secure your ITIN, prepare or coordinate the Form 1040-NR and any state return, and align the Canadian reporting so your foreign tax credit is fully claimed. Where past years were missed, we look at whether a corrective filing path is appropriate, and we plan ahead for the FIRPTA withholding and depreciation recapture that will land when the property is sold. If you own — or are about to buy — U.S. rental property, we offer a free initial consultation to walk through your facts and the most sensible structure.

For the broader picture, see our Canada-U.S. cross-border tax hub and the cross-border tax overview, our pages on U.S. estate tax for Canadians and tax planning for new Canadian residents, and our guide to buying U.S. real estate as a Canadian. If you have filing gaps to clean up, our overview of the U.S. streamlined filing procedures and FATCA and FBAR compliance pages explain the catch-up routes.

This page is general information, not legal or tax advice. Cross-border tax outcomes depend on your specific facts and on the rules of both Canada and the United States, and the relevant rates, thresholds, and forms can change. You should obtain advice tailored to your circumstances before acting.