Many Canadians bought real estate in the United States while prices were low and the Canadian currency was strong. Because U.S. real estate has regained value in recent years and the dollar has depreciated, now may be a good moment to sell. However, don’t sell without doing some tax planning.
Make sure you understand how U.S. and Canadian taxes come into play as you prepare to sell your U.S. property. Knowing all of the details will help you keep more of your profit.
There are a few considerations Canadians selling property in the United States should keep in mind:
The US Withholding tax on Capital Gains for Non Residents
This may come as no surprise, given the rules are similar in Canada: if you sell your property for more than you paid for it, you must pay capital gains tax on the difference, minus certain expenses.
Regardless of where you usually reside or pay taxes, all owners of U.S. real estate must pay income tax on the gain on the sale of that property. The IRS withholds tax on the proceeds of a U.S. real estate sale if you are not a U.S. citizen.
Filing a non-resident US tax return
On your Canadian tax return, you cannot deduct the amount of withholding tax you paid. To determine the exact amount of tax payable on the capital gain from the sale, you must file Form 1040NR U.S. Nonresident Alien Income Tax Return with the IRS. You will receive a refund if the withholding tax was higher than the tax due. To support the tax withheld, you must present an IRS-stamped copy of Form 8282.
The amount of the withholding tax is 15% of the proceeds of the sale unless the buyer is an individual intended to live in the property for at least two years following the sale in which case:
- Withholding may be reduced to 10% if the sale price is between USD 300,000 and USD 1,000,000.
- There is no withholding tax if the sale price is less than USD 300,000.
For either of these exemptions, the buyer must verify that she or he intends to live in the property.
If you estimate the tax on the capital gain to be less than the amount of tax withheld, you can seek a reduction or exemption from withholding tax. By the sale closing date, the application must be in progress, and the title agent may keep the entire withholding in escrow waiting for an IRS response.
You need to report gains to CRA too
As a Canadian resident, you are taxed on your worldwide income, so the sale of your U.S. property, as well as any gains or losses, must be recorded in both Canada and the United States.
You will file your Canadian tax return and record the capital gain. Taxes paid in the United States will be deducted as a foreign tax credit.
Foreign tax credits are scrutinized by the CRA, which demands a large quantity of information to justify the credit. The CRA rejects more than 80% of overseas tax credit applications, and dealing with these challenges is costly.
To avoid these hassles, work with an accountant who is experienced with cross-border tax, such as IDM Professional Corporation CPA, during the selling process to ensure that everything is done in accordance with IRS and CRA standards.
The Canada-U.S. Tax Treaty is on your side
The Canada-US Tax Treaty, fortunately, is structured up to avoid double taxation. Because the United States has the right to tax capital gains first, you can use your U.S. tax liability as a foreign tax credit against your Canadian and provincial taxes. Remember that you must pay your US taxes in order to qualify for the international tax credit.
Long Term Capital Gain
On properties owned for more than a year previous to the sale, long-term capital gains are taxed at a lower rate. The amount of long-term capital gain is determined by your tax bracket. If you bought a house for $50,000 in 2010 and sold it for $150,000 six years later, you will owe a 15% long-term capital gains tax.
You must follow a number of rules and make specific fees to the government when selling your property in the United States. However, if you have enough time on your hands and the right professionals on your side, you may keep more money in your pocket and enjoy a more seamless process from beginning to end.
It’s usually a good idea to get the services of professionals to help you with the process. A real estate agent who is familiar with selling Canadian-owned property is a good place to start, and a tax accountant with cross-border experience can be helpful.
Feel free to reach out to IDM Professional Corporation CPA. With the proven expertise for cross-border taxes, we could definitely help you.
