Are you ready to change your lifestyle? Do you want to profit from the appreciation of your property in the United States? Whatever the reason for selling your property, you must know what awaits you to prepare well. The process can be complex. So take care to do business with a real estate professional who knows your situation well. Also, use the services of a tax or cross-border law expert who can save you from possible problems with the IRS or the CRA.
You will have to pay US tax on your winnings.
You may already know this, as the requirements are similar in Canada. If you sell your property for more than you paid, you must pay tax on the difference between the two, less specific fees. This is called capital gains tax.
However, you may not have known that if you sell a property in the United States, you must first comply with the tax obligations of the United States government (even as a Canadian resident).
Reporting income and paying taxes in the United States is relatively simple: report the gain (or loss) on the sale of your property on a non-US resident tax return (formula 1040NR). If funds have been withheld under FIRPTA (see point 4), the tax payable will be deducted from this amount, and the balance will be refunded to you.
You will also have to declare your income to the Canadian government.
As a Canadian resident, you must pay tax on your worldwide income. The sale of your property in the United States and the resulting gains or losses must therefore be declared in Canada as in the United States.
The Canada-US tax treaty works in your favor.
Fortunately, the Canada-US tax treaty allows you to avoid double taxation. Since the United States is permitted to tax capital gains first, you can claim this tax liability in the United States as a foreign tax credit on your federal and provincial income tax returns in Canada. Remember: To qualify for the foreign tax credit, you must pay tax in the United States.
You will have to follow the withholding tax rules.
Canadian residents selling real estate in the United States must comply with the withholding rules set out in the Foreign Investment in Real Property Tax Act (FIRPTA). These rules require that 15% of the sale price be remitted to the IRS at the time of the sale. For the sale of a property for $500,000, it is necessary to hand over the tidy sum of $75,000.
This is not a tax but a withholding tax on capital gains. It is intended to ensure that you meet your US income tax obligations. The IRS holds funds until your US tax return is received and processed, after which time the balance is refunded to you.
The good news: it is possible to reduce or even eliminate this withholding tax.
- The first exception relates to the cost of the property and the buyer’s intentions. If the property sells for less than $300,000 and the buyer intends to use it at least 50% of the time over the next two years, the holdback can be lifted completely.
- The second exception applies to obtaining a tax withholding certificate from the IRS. As a general rule, the tax payable is much lower than the value of the funds withheld. The tax is calculated according to the difference between the price you bought your property (less specific fees) and the price you purchased and sold, while the withholding rules apply to the total sale price.
You can request a withholding certificate if you believe your US tax liability will be less than 15% of the sale price. If you apply to the IRS well in advance, your Escrow Agent may hold this 15% in escrow while the application is processed. The IRS typically processes this type of request within approximately 90 days, after which the withheld funds are returned to you, less any amount owed to the IRS. This way of doing things generally makes it possible to access the funds much more quickly than if one has to wait for a refund from the IRS.
To request a withholding certificate, Form 8288-B must be completed and submitted to the IRS before closing the transaction.
The secret: planning
Do you decide to apply for a withholding tax certificate? Please don’t delay. It’s a long process. Gather information about the property, get the buyer’s consent, and find an escrow agent who will take care of your procedures.
If you don’t do this and the funds are held at the time of the sale, you won’t be able to access the amount equal to 10 or 15% of the sale price until you file your tax return, and the IRS will not have calculated your refund. It is essential to know that although you are entitled to a refund, you may have to wait. Indeed, some Canadians say they recovered the funds after a few months, while others had to wait up to two years.
Selling a property in the United States requires you to follow several rules and pay funds to the government. If you put in the time, you can ensure that more funds stay in your pocket and enjoy a much smoother end-to-end process.
It is essential to call on professionals who will accompany you throughout your steps. To get started, hire a real estate agent who is experienced in selling Canadian-owned properties. It may also be essential to retain the services of a tax adviser or a lawyer with good experience in cross-border transactions.