Do you know what to Consider Before Selling Your US Property?
Remember the days when the Canadian dollar was strong and US properties were depressed? Yeah, those were the good old days. So good, in fact, that quite a few Canadians purchased US real estate as an investment. But the tide has changed now, and US real estate is valued at an all-time high making Canadian investors wonder if it is the right time to cash in by selling their US property.
While we can’t answer the question of whether you should sell, we can say you should definitely do some tax planning before you do sell. As a Canadian citizen with US property, you have to deal with both the IRS and the CRA, so knowing what to expect and how to reduce your tax burden can make a real difference. Here are some things you will need to know.
The Canada-US Tax Treaty Works in Your Favor – Sort Of
The tax treaty between our two countries is set up to avert double taxation. When it comes to selling US property, not surprisingly, the US will tax your capital gain first. The good news is you can claim the tax you pay in the US as a foreign tax credit against your Canadian and provincial tax. If, however, your Canadian taxes are higher than what you pay in the US, you will be responsible to pay the balance in Canada (more on this below).
Paying US Capital Gains Tax for selling US Property
Just like in Canada, if you sell your home for more than you paid for it originally, you must pay capital gains tax on the difference after deducting a few expenses. As of 2022, if you owned the property for more than a year, you will be required to pay US taxes of:
- Nothing if you are a single taxpayer with taxable income less than $39,376
- 15% if you are a single taxpayer with taxable income less than $434,511
- 20% if you are a single taxpayer with taxable income of more than $434,551
If you owned the property for less than a year, your profit is taxed as if it were ordinary income in the US. To file, you will need to report the gain on US Non-Resident Income Tax Return (1040NR).
But Wait, There’s More!
Here’s where it gets more complicated. As a Canadian resident , you must follow the withholding rules established in the Foreign Investment in Real Property Tax Act (FIRPTA). This is not technically a tax, but a way for the IRS to ensure you meet your US tax obligations by withholding 15% of the sale price. Once your US tax return is filed and processed, any balance of that 15% is refunded to you. There are a couple of ways to eliminate, or reduce, this requirement:
- If the property sells for less than $300k, withholding can be completely eliminated if the buyer plans to live in the property at least half of the time for the two years following its purchase.
- If the property sells for between $300k and $1m, withholding may be reduced to 10%, again if the buyer plans to live in the property at least half of the time for the two years following its purchase. While it is odd that your tax requirements rest in the hands of the buyer, it may pay to sell to someone who plans to live on the property and will officially certify this intent.
- Alternately, you can apply for a Withholding Certificate by filing Form 8288-B with the IRS before closing if your tax liability will be less than 15% of the selling price. In most cases it is, since taxes are determined on the difference between what you paid originally and what the property sold for, not the full sales price. (i.e., To keep it simple, let’s say you originally bought a US property for $250k, then sell it 5 years later for $400k. FIRTPA would require the IRS to hold $60k (15% of $400k) when you would only owe $22,500 (15% of $150k) if your taxable income is less than $434,511 and more than $39,376.)
If you decide to apply for a Withholding Certificate, you are required to share details on the property and the buyer, as well as have an escrow agent. But if you apply early enough in the process, your escrow agent can hold the 15% for you instead of the IRS while your application is pending. According to the IRS, it usually takes approximately 90 days to process a Withholding Certificate, but it can take longer since they are still catching up from COVID delays. Once approved, your funds can be released to you from escrow minus what you owe to the IRS. This can mean you have quicker access to those funds, though it is no guarantee.
If you don’t go through this process, the IRS will control these funds until your tax return is filed and processed, which can take anywhere between a few months to a couple of years. If you need the funds from the sale, it is definitely worth the effort to apply for the Withholding Certificate.
Don’t Forget, You Have to Report the Gain in Canada too
All Canadian residents are required to pay income tax on all of their income, regardless of where it was earned. Therefore, you have to include any gains – as well as the taxes paid in the US as a foreign tax credit – on the sale of your property. The CRA requires you to submit your stamped copy of US Form 8282, along with a lot of other information, to prove what you paid and determine what you owe. And the CRA pays close attention to these types of filings, challenging up to 80% of them annually.
If you own US property and have plans to sell it, we can help you understand the process, gather what is needed, and prepare in advance. Cross-border tax issues can get complicated and expensive, so we highly recommend you reach out to us so everything is completed in a way that will make both the IRS and CRA happy. Contact Hachem Halabi or email him directly for more information.