Income Tax for Investors

If you received income from your rental properties or any other types of US investments, you must file a US tax return, except when the withholding tax was withheld. The US fiscal year runs from January through December and the expiration date of that statement for most non-residents goes through June 15 annually.

Expenses are deducted from rental income and any losses may be transferred to the following year and thus, consecutively, until the eventual sale of the property, when certain allowable losses may be used to minimize any capital gain tax on the property.

Admissible expenses include advertising, cleaning and maintenance, commissions, insurance, accounting and legal fees, administration fees, mortgage interest, repairs and supplies, property tax and tangible personal property taxes, electricity bills, water bills etc. Airfares and car rentals are also deductible for homeowners visiting the US to buy, sell or maintain their rental property.

Rental property is depreciated over 27 and a half years. Furniture and equipment between 5 and 15 years. By availing these deductions, as a result, for most homeowners, there is no taxable income.

Understanding Vacation Home Loss against Passive Activity Loss (Loss on Passive Activity)

There are two methods of calculating the losses incurred in managing your rental property:

Vacation Home Loss

Where your days of personal use exceed 14 days or 10% of your rented days, any damages are considered “holiday home damage.” The expenses incurred during the year are pro rata between the total number of days of personal use divided by the total number of days rented plus the total number of days of personal use. Expenses are used up to the amount of income received and the balance of all unused expenses is transferred to the following tax year as “holiday loss“.

Personal Days (Personal Use)

These are any days you or your friends and family use the property at no cost or less than the cost of fair rent. Days used for maintenance or repairs are not considered days of personal use.

Example – Rent Income = $ 25,000. Expenses = $ 30,000. Total rented days is 200 and total personal days is 25. Expenses of $ 30,000 are pro-rated for 25/225 = 88.89% of business usage.

$ 30,000 x 88,89% = $ 26,667 of allowable expenses. The expenses are used up to the same amount of income of $ 25,000 dollars, thus allowing to play the damage of the holiday home of $ 1,667 dollars.

Attention: note that the holiday home loss can only be used to minimize the annual income tax payment to the IRS. It can not be used to minimize the Capital Gains Tax at the time of sale.

Loss in passive activity

When your days of personal use are less than or greater than 14 days or 10% of your rental days. Any losses are considered “loss in passive activity“.

Example – Rent Income = $ 25,000. Expenses = $ 30,000. Total rented days is 200 and total personal days is 10. Expenses of $ 30,000 are pro-rated for 10/210 = 95.24% of business usage. $ 30,000 x 95,24% = $ 28,572 of allowable expenses. Rental income of $ 25,000 dollars – Expenses of $ 28,572 = $ 3,572 of loss in passive activity.

Unlike “holiday home loss“, “loss in passive activity” can be used to minimize tax dollars.