Form 8840 for Canadian Landlords in New York

What Is Form 8840?

Form 8840 (Closer Connection Exception Statement for Aliens) is an IRS form that allows you to claim an exception to US resident alien status under the Substantial Presence Test (SPT). Without this exception, Canadians who spend too many days in the US may be classified as US residents for federal income tax purposes—even while remaining Canadian tax residents.

The Substantial Presence Test is an objective, mechanical test. If you accumulate:

• 31 or more days in the US during the current year, and
• 183 or more days in the US over the past three years (weighted formula: current year × 1, prior year × 1/3, year before × 1/6)

...you meet the SPT and are classified as a US resident alien for federal tax purposes.

Form 8840 provides an escape valve: if you can demonstrate a "closer connection" to Canada, you can be treated as a non-resident alien despite meeting the SPT. This is critical for Canadian landlords managing US rental properties who also visit the US regularly.

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How Form 8840 Applies to Canadian Landlords in New York

The Substantial Presence Problem

Many Canadian landlords—particularly those from Quebec, Ontario, and Atlantic Canada—own investment properties in New York. These properties require periodic visits for property inspections, tenant meetings, contractor coordination, and maintenance reviews. It's easy to accumulate 31+ days annually, especially over a three-year period.

Without Form 8840, classification as a US resident alien triggers:

• Federal income tax filing requirements on worldwide income
• NIIT (Net Investment Income Tax) of 3.8% on passive rental income
• Alternative Minimum Tax (AMT) considerations
• Potential loss of Canada-US tax treaty benefits

The Closer Connection Exception

The closer connection exception (IRC §7701(b)(3)(B)(i)) allows you to be classified as a non-resident alien if you demonstrate:

1. You did not establish a tax home in the US during the year
2. You maintained a closer connection to Canada than to the US throughout the year

For a Canadian landlord with US rental property, "closer connection" typically means:

• Your principal residence (primary home) remains in Canada
• Your permanent home (where you have the right to live year-round) is in Canada
• Your family, social ties, business interests, and financial affairs are centered in Canada
• You maintain Canadian health insurance, driver's license, voter registration, and banking

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Who Must File Form 8840

You should file Form 8840 if you meet all of the following conditions:

1. You are a Canadian citizen or permanent resident (status as an alien under US tax law)
2. You met or would meet the Substantial Presence Test for the year in question
3. You have a closer connection to Canada than to the US
4. You maintained your tax home in Canada (not the US) throughout the year
5. You own or manage US rental property in New York (or have other US presence reasons)

You do not file Form 8840 if:

• You voluntarily elected to be treated as a US resident alien (e.g., by filing Form 8233)
• You actually intend to establish US residency
• You've already been classified as a US resident by another mechanism (visa type, green card, etc.)

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Step-by-Step: How to Complete Form 8840

Step 1: Gather Documentation

Before completing Form 8840, assemble evidence of your closer connection to Canada:

• Canadian residence documents: mortgage papers, property tax bills, lease agreements (if renting)
• Canadian identification: passport, driver's license, health insurance card
• Day count records: detailed calendar of US presence (entry/exit dates)
• Financial records: bank statements (Canadian), investment accounts (Canadian residence)
• Family documentation: spouse/children residence status, school enrollment in Canada
• Employment/business records: employer location, business registration (if applicable)
• Property records: deed, property tax bills for any US real estate

Step 2: Count Your Days in the US

Form 8840 requires you to list specific dates and durations of US presence. The SPT day-counting rules state:

• A "day in the US" includes any day where you are physically present at any time during the day
• Arrival/departure days both count as US days
• Transit days through the US count as US days (even if not leaving the airport)

Important: Create a detailed calendar showing:

• Entry dates to the US
• Exit dates from the US
• Purpose of each visit (property management, inspection, business, family, etc.)

Step 3: Complete Form 8840 Sections

Part I – Closer Connection Statement

• Enter your name, address, SSN/ITIN
• Confirm your alien status (Canadian)
• State the tax year in question

Part II – US Days

• List all periods of US presence during the year
• Calculate total days in the US
• Confirm whether you met the SPT

Part III – Closer Connection Information

• Describe your permanent home location (Canadian address)
• Confirm you have the right to live there year-round
• List your family members and their residency status
• Describe ties to Canada (employment, business, family, financial)
• Describe ties to the US (list only the property/business requiring US presence)

Part IV – Tax Home Statement

• Declare that your tax home is in Canada (not the US)
• Explain why your tax home is Canada (primary residence, main economic interests located there)

Step 4: File with Your US Tax Return

Form 8840 is filed as an attachment to your US federal tax return (Form 1040-NR, U.S. Nonresident Alien Income Tax Return), not separately. You must file Form 1040-NR even if claiming non-resident status via Form 8840, because:

• You had income (rental income from New York property) during the year
• The form establishes you are a non-resident for tax purposes

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New York-Specific Considerations for Landlords

New York State Income Tax (Form IT-203-B)

Even as a non-resident alien for federal purposes, New York State treats you differently:

• New York considers you a non-resident if you don't maintain a permanent home in NY and spend fewer than 183 days there annually
• Non-residents must file Form IT-203-B (Non-Resident and Part-Year Resident Income Tax Return) if they have NY-source income
• NY rental income is taxable at the NY non-resident rate: 10.9% (top rate as of 2024)
• You must report all net NY rental income on your NY state return, even if claiming US non-resident status on Form 8840

New York City Income Tax

If your rental property is in New York City (NYC), you face an additional city income tax:

• NYC non-resident income tax rate: 3.876% (approximate) on NY-source income
• Some rental income from NYC properties may be subject to both state and city tax
• This is separate from and in addition to New York State tax

Total NY tax burden on NYC rental income could exceed 14.7% (state + city), plus US federal tax if applicable.

Property Tax Considerations

New York's effective property tax rate averages 1.73% statewide, though this varies significantly:

• NYC property taxes: 0.8–0.9% of assessed value
• Westchester County: 1.2–1.8%
• Upstate: 1.5–2.5%

These property taxes are deductible on your Canadian T1 return (up to certain limits under the foreign tax credit system).

Interaction with Form 8840 and NY Filing

Here's the critical point: Filing Form 8840 does not exempt you from New York State income tax.

Form 8840 establishes you as a non-resident alien for US federal purposes only. New York State maintains its own residency rules (distinct from federal rules). You must:

1. File Form 8840 with your US federal return (Form 1040-NR) to claim non-resident status federally
2. File Form IT-203-B with New York State to claim non-resident status for NY income tax
3. Report NY-source (rental) income on both returns
4. Pay 10.9% NY state tax + applicable city tax on net rental income
5. Claim a foreign tax credit on your Canadian T1 return for taxes paid to New York

Foreign Tax Credit Coordination