If so, you should be aware of the U.S. Foreign Investment in Real Property Tax Act (FIRPTA).
FIRPTA generally requires the purchaser, or their agent, to withhold a percentage of the gross selling price and remit it to the Internal Revenue Service. The reason for the withholding tax is to encourage compliance with the requirement for U.S. non-residents disposing of real property situated in the U.S. to file a U.S. Federal tax return and report any resulting gain or loss. The encouragement comes from the fact that the withholding tax, based on the gross selling price, is usually greater than the actual tax liability associated with the disposal. So, if you want the excess withholding tax refunded you will need to comply with the Federal tax filing requirement.
The percentage of withholding tax is based on the selling price and the purchasers intended use for the property and can be 0%, 10% or 15%.
- If the sale price is greater than $1M a withholding rate of 15% would apply.
- If the sales price is between $300K and $1M, and the purchaser intends to rent the property out, a 15% withholding rate would apply. If the purchaser intends to use the property personally a10% withholding rate would apply.
- If the sales price is less than $300,000, and the purchaser intends to rent it out, a 10% withholding rate would apply. If the purchaser intends to use the property personally a 0% withholding rate would apply.
If you expect the actual tax liability to be less than the withholding rate that would apply to your sale, it is possible to have the withholding rate reduced to be more reflective of the actual taxes that will be payable on the filing of your U.S. Non-Resident Alien Income Tax Return, Form 1040NR. To apply for a reduced withholding rate you must complete and submit an Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, Form 8288-B. It generally takes the Internal Revenue Service 90 days or so to process the application and issue the withholding certificate, which will indicate the reduced amount of withholding tax.
In order for the 8288-B application to be processed it must include the taxpayers U.S. Individual Taxpayer Identification Number (ITIN). If the taxpayer does not have an ITIN, a completed application for an ITIN, Form W-7, will need to be submitted as well.
Once the sale is complete, the purchaser or their agent will issue a Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests, Form 8288-A. Form 8288-A includes details about the sale such as the name, address and ITIN of the seller, the date of transfer, selling price and the Federal income tax withheld. This form will need to be attached to the U.S. Federal tax return when filed in order to claim a credit for the taxes withheld.
Regardless of the withholding rate, or if a gain or loss has been realized, you will be required to file a U.S. Federal Non-Resident Alien Income Tax Return, Form 1040NR, to report the transaction. Form 1040NR is generally due by June 15th of the subsequent year and may be extended to October 15 by submitting an extension request, which includes a reasonable estimate of the actual taxes owing. In order to file Form 1040NR an ITIN will be required. If not already obtained, a completed Form W-7 can be submitted with the tax return. If the property was located in a State that imposes personal income tax, you may be required to file a State tax return as well. The State may also have it own withholding regime.
The country that has the first right to tax real property is generally the country where the property is located. So even though you may be a citizen and tax resident of Canada the sale of a U.S. property generates a U.S. Federal, and possibly State, tax filing requirement. As a tax resident of Canada, you are subject to tax on your worldwide income as such the disposition of the U.S. property would also be reported on your Canadian Individual Income Tax Return. If a gain is realized and taxes are payable in the U.S., they would be eligible for a foreign tax credit claim on your Canadian income tax return. Through the foreign tax credit mechanism, a taxpayer is generally not subject to double tax, i.e. income tax in both Canada and the U.S. on the same transaction.
If you are a Canadian resident selling a U.S. property and require assistance completing related U.S. Federal and State personal income tax returns and/or forms please contact our Cross-Border Tax Services Manager, Jay P. Trudell, CPA, CA at 519-539-4717 extension 205 or email firstname.lastname@example.org.