When you sell your U.S. property/residence, such as a vacation property, a percentage of the sale price will be withheld by the buyer under the Foreign Investment in Real Property Tax Act (FIRPTA).
Capital Gains Tax for Canadians Selling U.S. Property
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Selling U.S. Property
The buyer acts as a withholding agent for the IRS, and the title/escrow company assists the buyer with the IRS obligations.
The default amount of taxes withheld is 15%, but there are reductions and exemptions of the withholding rate for property intended for residential use by the buyer. The buyer must sign an affidavit stating those are their intentions.
Here’s how it works:
- Sale price under $300,000, and buyer signs affidavit: The sale is exempt from withholding taxes.
- Sale price between $300,000 and $1,000,000, and buyer signs affidavit: The withholding rate is 10%.
If your final U.S. taxes owing will be significantly less than the 15% withholding, or if you are selling your property at a loss, you can apply for a withholding certificate by completing Form 8288-B (Application for Withholding Certificate), which must be submitted to the IRS by the closing date. When the application is for a reduction of the withholding amount, the application will include a calculation of the expected capital gains tax to demonstrate to the IRS that the taxes owing will be less than the amount of the withholding.
How to Calculate the Capital Gain when Selling U.S. Property
Your capital gain is simply the sale price of your property, less the following:
- The original purchase price
- Your investment in non-decorative capital improvements—such as home additions, re-roofing, landscaping, etc.—over the years you owned the property
- Closing costs such as realtor fees, legal fees, title charges, etc.
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Capital Gains Tax for Non Residents
Your capital gains tax rate depends on three factors:
1 How Long You’ve Owned Your Property
If you have owned your property for 365 days or less, it will be considered a short-term capital gain that is treated as ordinary income and will be taxed at the normal ordinary rates for tax purposes. The reasoning behind this is that you may have purchased your property to flip it.
If you have owned your property for longer than a year, it will be taxed as a long-term capital gain at preferential capital gains rates.
2 Your Tax Bracket
Your tax bracket is determined by the total amount of your U.S. income. For short-term capital gains, the tax rate will range from 10% to 37%. For long-term capital gains, the tax rate will be up to 20%.
3 Vacation Property or Principal Residence?
In most cases, Canadians selling U.S. property are selling their vacation homes, in which case the rates above apply.
Under certain use tests, and also for Canadian residents who are also U.S. persons, an exemption or partial exemption from the capital gains tax may be applicable.
Tax Filing Requirements
1 File Your U.S. Federal and State (if applicable) Tax Returns
You will require an Individual Taxpayer Identification Number (ITIN) to file your taxes.
2 File Your Canadian Tax Return
As a Canadian resident, you are subject to tax on your worldwide income. Any gains or losses from the sale of U.S. property must also be included on your Canadian tax return.
However, in Canada only 50% of your capital gains are taxable, and you may be eligible to claim a foreign tax credit on income taxes paid.
Selling Your U.S. Property Can Be Taxing!
Managing the entire process on your own isn’t for the faint of heart, but we’ve got you covered.
We can help you obtain your ITIN and file all FIRPTA documents required by the IRS. We can also prepare your U.S. federal and state tax returns, and your Canadian tax return. We can assist you virtually or in person.
Contact us today and let us handle the dirty work, so you can breathe easy.
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