For many Canadian snowbirds, a vacation property in the U.S. offers the perfect winter escape. But when the time comes to sell that U.S. home or condo, many are surprised to learn about the tax and filing requirements on both sides of the border.
Whether you're selling a Florida condo, an Arizona townhouse, or a California rental, Canadian residents need to be aware of several key obligations when disposing of U.S. real estate. Here’s what you need to know.
1. U.S. Withholding Tax on the Sale
The United States imposes a non-resident withholding tax under the Foreign Investment in Real Property Tax Act (FIRPTA). This is often the first tax issue that arises when a Canadian sells U.S. property.
Key points:
- By default, 15% of the gross sale price is withheld at closing and remitted to the IRS.
- This withholding is not the actual tax owed — it’s a prepayment against your final U.S. tax liability.
- The buyer (or their agent) is responsible for ensuring this withholding occurs.
Possible Reductions in Withholding:
- If the property was sold for less than USD $300,000 and the buyer intends to use it as a personal residence, the withholding may be exempt.
- You can also apply for a withholding certificate (IRS Form 8288-B) before the sale to request a reduction based on the actual expected tax owed. This must be submitted before closing, and processing times can vary.
2. Filing U.S. Tax Returns
Regardless of whether any tax is ultimately owed, non-residents must file a U.S. income tax return to report the gain or loss on the sale.
IRS Form 1040-NR is required, along with Schedule D and Form 8949 to calculate capital gains.
Important notes:
- You may be able to deduct the cost of improvements, selling expenses, and original purchase price to reduce the gain.
- The current U.S. long-term capital gains tax rate for non-residents is typically 15%, although it may be higher for larger gains.
- Filing is required even if the withholding fully covers (or exceeds) the actual tax liability — this is how you request a refund of any excess.
To file, you'll need a U.S. Individual Taxpayer Identification Number (ITIN) if you don't already have one.
3. Canadian Tax Implications
As a Canadian tax resident, you must also report the sale to the Canada Revenue Agency (CRA) with your individual tax return.
Key considerations:
- The property is considered foreign property and subject to capital gains tax in Canada.
- You can claim a foreign tax credit for the U.S. tax paid, reducing double taxation.
- Exchange rates at the time of purchase and sale must be used to calculate the gain in Canadian dollars.
- If you rented the U.S. property at any point, depreciation (“CCA”) taken in the U.S. may need to be recaptured for Canadian tax purposes.
4. Common Pitfalls to Avoid
- Assuming no taxes apply because you’re a non-U.S. citizen. FIRPTA applies specifically to foreign sellers.
- Not applying for a withholding certificate in time, which can lock up thousands of dollars unnecessarily.
- Failing to file IRS Form 1040-NR, which can lead to penalties and delays in receiving a refund.
- Overlooking the Canadian tax reporting, especially if the U.S. property was bought many years ago and has appreciated significantly.
5. How a Canadian CPA Can Help
Selling U.S. real estate as a Canadian involves both U.S. and Canadian tax systems, treaty provisions, and currency conversions. Our firm regularly helps snowbirds and other Canadian residents navigate:
- FIRPTA withholding and IRS forms (8288, 8288-A, 8288-B)
- U.S. tax return preparation and ITIN applications
- Canadian capital gains reporting and foreign tax credit claims
- Advice on recordkeeping, currency exchange, and timing of sales
Final Thoughts
If you’re a Canadian resident planning to sell U.S. property — or you’ve already sold and aren’t sure what comes next — we strongly recommend speaking with a cross-border tax professional. Filing obligations can be complex, but proper planning and timely compliance can help you avoid costly penalties and maximize your after-tax return.
Need Help with a U.S. Property Sale?
Contact us today to discuss your specific situation — we’re here to help you keep your tax affairs in order on both sides of the border.
This blog was written using the assistance of ChatGPT.
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