Maybe you’re ready for a change of lifestyle, or perhaps you simply want to cash in on the appreciation you’ve seen on your United States property. Whatever your reason for selling, it’s important to know what’s ahead so you can prepare for the process. It can get complicated, so make sure you work with a real estate professional who is knowledgeable about the issues and a cross-border tax or legal expert who can help make sure you don’t end up in hot water with the IRS or CRA.
1. You will have to pay U.S. tax1 on your gains.
This may not come as a surprise, as the requirements are similar in Canada: If you sell your home for more than you paid for it, you’re required to pay tax on the difference, minus some expenses — known as capital gains tax.
What you may not know is that when you sell property in the U.S., your tax obligation falls to the U.S. government first — even as a Canadian resident.
If you have owned your property for at least a year, you will be subject to long-term capital gains tax at one of the following rates (as of 2022):
- 0% if you’re a single taxpayer with a taxable income of less than $39,376
- 15% if you’re a single filer with taxable income less than $434,551
- 20% if you’re a single filer with a taxable income of more than $434,551
- If you owned your property for less than a year, capital gains are taxed like ordinary income earned in the U.S.
Filing and paying U.S. taxes is a fairly straightforward process – you need to report the gain (or loss) of your property on a U.S. Non-Resident Income Tax Return (1040NR). If you had funds withheld under FIRPTA (see point 4), then the tax owing will be deducted from that amount and you’ll get a refund for the balance.
2. You need to report your gains to the Canadian government too.
As a Canadian resident, you’re subject to income tax on your worldwide income — so the sale of your U.S. property, and any gains or losses incurred, has to be reported in Canada as well as the U.S.
3. The Canada-U.S. Tax Treaty is on your side.
Fortunately, the Canada-U.S. Tax Treaty is set up to avoid double taxation. Since the U.S. has the right to tax the capital gain first, that U.S. tax liability can be claimed as a foreign tax credit against your Canadian and provincial tax. Just remember, to qualify for the foreign tax credit, you must pay your U.S. taxes. And, if your Canadian taxes are higher than your U.S. taxes, there would be a balance to pay in Canada.
This article by Altro Law partner Bradley Thompson provides further details about U.S. capital gains tax, your Canadian tax liability and provides an example of how the Canada-U.S. Tax Treaty would apply in the sale of a U.S. home.
4. You’ll be subject to withholding rules
If you’re a Canadian resident and selling real estate in the U.S., you’re subject to withholding rules under the Foreign Investment in Real Property Tax Act (FIRPTA). These rules require 15 per cent of the sale price to be remitted to the IRS at the time of the sale. On the sale of a $500,000 property, that’s a whopping $75,000.
This is not a tax, but a withholding against capital gains tax – basically, it’s in place to ensure you meet your U.S. income tax obligations, as the IRS holds the funds until your U.S. tax return is submitted and processed and then refunds the balance to you.
The good news is, there are ways to reduce or eliminate this withholding requirement.
- The first exception relates to the cost of the property and the intentions of the buyer. If the property sells for less than $300,000 — and the buyer intends to use it at least 50 per cent of the time for the next two years — then the withholding can be waived altogether.
- The second exception applies if you get a Withholding Certificate from the IRS. Generally speaking, your tax liability will be significantly less than the amount of withheld funds, as taxes are calculated on the difference between what you paid for your property (minus some expenses) and how much you sold it for, while the withholding rules apply to the full selling price.
If you expect your U.S. tax liability will be less than 15 per cent of the selling price, you can apply for a Withholding Certificate. Provided you apply with enough notice to the IRS, your escrow agent can hold the 15 per cent in escrow while the application is pending. The IRS typically processes the application within about 90 days, after which point the withheld funds will be released back to you, less any amount payable to the IRS. Typically, this is a much quicker route to getting those funds in your hands than waiting for the IRS to issue a refund.
The application for a Withholding Certificate is a Form 8288-B and must be completed and sent to the IRS before closing.
5. Advance planning is key
If you decide you want to apply for a Withholding Certificate, you’ll need to plan ahead — this application takes time. Plus, you need to gather information about the property, get the buyer on board and secure an escrow agent who will handle the process for you.
If you don’t take this step and funds are withheld at the time of the sale, you’re out of pocket that 10 per cent or 15 per cent until you file your tax return and the IRS calculates your refund. It’s important to note that while you’re entitled to a refund, you may be waiting for some time — while some Canadians report getting their money back after a few months, others have waited up to two years for their money.
Selling your U.S. property requires you to follow a number of rules and make certain payments to the government. But done with enough time on your side, you can keep more money in your pocket and enjoy a smoother process from start to finish.
As always, it may be helpful to get professionals involved to assist you with the process. Having a real estate agent who is experienced in selling Canadian-owned property is a great place to start, and a tax expert or lawyer with cross-border expertise can be invaluable.
6. You can access your U.S. equity other ways
Finally, if you’re thinking of selling your U.S. property in order to access U.S. cash to cover an emergency or fund other goals, there are other options available — options that don’t involve having to pay capital gains tax or give up your U.S. home.
You can tap into your U.S. equity by either refinancing your home or through a Home Equity Line of Credit. Both options allow you to have U.S. cash on hand without selling.
1 Consult your financial, tax, legal and other professional advisors for advice on your individual situation.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.