Appreciation tax break on rental properties

[Jared Comeau]

Good morning BP

I have a question this morning. I'm hopinganyone knows how the tax break works in the US for the annual depreciation on a rental property works.

How long does the depreciation tax break last on the property?

Does the tax break apply to buying an older house say from the 50s?

Finally, does the tax break benifit cross the boarder to Canada or do we have to leave 100% of our taxable net in the US and file our taxes with the IRS in order to qualify for the tax break.

[Stephen Fryer]

HI @Jared Comeau.

As a Canadian, you have to pay taxes on any income you earn worldwide. I'm pretty certain that it's the same for Americans. Canada has a reciprocal tax treaty with the US that essentially allows you to pay whatever taxes you  owe to the IRS and then have them flow through to your Canadian taxes so that you are credited. There are specific rules for what constitutes a flow through entity and if you don't respect those rules, the flow through provisions can be denied and you will have to pay taxes twice; once in the US and again in Canada. 

The principles for depreciation are similar in both countries with minor variances. The age of the property is not really relevant to the equation. I buy houses that were built in the early 1900s and will depreciate them for the same amount of time as a house built in 2010. At a conceptual level: if you buy a house for $120K; and the land is worth $20K; you would be able to depreciate the $100K over a 27.5 year period. For every full year a property is in service, you depreciate an equal amount. 3.6% if memory serves. The depreciation expense will be applied to your US earned income and can reduce your tax liability there. At the end of the year, whatever taxes you pay to the IRS are credited to you, provided you have respected the flow through provisions of the CRA. 

I have only a high level understanding of the treaty, CRA and IRS accounting provisions, so you need to contact a cross border accounting specialist for specific advice that meets your individual circumstances.