Share
Written By :
There are tax implications when selling a property located in the U.S. that you need to be aware of to avoid unpleasant surprises.
When a Canadian resident sells U.S. real property, whether it is in Florida or elsewhere, withholding tax of 15% of the sale price is payable. For example, a home that sells for US$400,000 would require that US$60,000 be remitted to the Internal Revenue Service (IRS). This amount is collected from the sale price at the time of the transaction, either by the buyer or the agent, and then remitted to the IRS.
However, there are exceptions. The withholding tax does not apply if the sale is for less than US$300,000 (or it is reduced to 10% in the case of a sale between US$300,000 and US$1M) and the purchaser signs an affidavit stating that the new property will be a principal residence that will be occupied at least 50% of the time during the two years following the purchase.
The IRS applies this requirement under the Foreign Investment in Real Property Tax Act (FIRPTA) to ensure that the seller does not avoid its tax obligations in the U.S.
The good news is that the property seller will be able to recover some, if not all, of the withholding tax that was paid at the time of the transaction.
Recovering the tax withheld
The rate of 15% of the sale price is generally higher than the effective U.S. tax rate, which is between 0% and 20% of the capital gain. The seller may therefore obtain a refund for any amount already paid in excess of the actual tax due.
In order to recover the funds, the seller will have to file a U.S. income tax return, which will show the capital gain on the sale of the property. The funds withheld for FIRPTA will then be deducted from the tax liability and the balance will be refunded.
Note that the seller will, in all cases, have to file a US tax return even if he has benefited from the exemption from the 15% withholding tax as described above.
The sale of real property in the U.S. does not relieve Canadian residents of their obligation to report the transaction and pay tax on the capital gain in Canada. However, the Canada – United States tax treaty makes it possible to avoid double taxation.
What forms are required?
Naturally, there are tax forms to be completed for this process. The 15% withholding tax is remitted to the IRS using forms 8288 and 8288-A. Once the forms have been processed and the withholding tax received, the IRS will remit a stamped copy of form 8288-A, which the seller needs to file the U.S. income tax return.
At the time of the sale, the seller must obtain an ITIN (Individual Taxpayer Identification Number). Equivalent to the social insurance number in Canada, this number is mandatory for the 8288 and 8288A forms to be processed and will be needed later to file a U.S. income tax return in order to recover some or all of the 15% withholding.
Canadian passport certification
The application to obtain an ITIN must be accompanied by a certified copy of your passport. Certification by Passport Canada can take weeks or even months. Furthermore, you will not have your passport during this time since it must be sent to Passport Canada for certification. The good news is that Raymond Chabot Grant Thornton is accredited by the U.S. tax authorities to certify Canadian passports the same day they are requested.
Our cross-border tax experts are also available to prepare the prescribed tax forms and the U.S. and Canadian tax returns simultaneously.
In short, it is in your best interest to consult an international tax expert with in-depth knowledge of both countries’ tax rules in order to avoid unpleasant surprises or long delays. This expert will be better able to accompany you in order to not only minimize the financial impact of the sale of real property in the U.S., but also recover your money as efficiently and quickly as possible.