Canadians who sell real estate in the US are subject to the Foreign Investment in Real Property Tax Act (FIRPTA). As a seller it’s important to understand what FIRPTA is and how to recover them.
What is the FIRPTA?
The FIRPTA is a withholding tax on the sale of US real property by a foreign person. So, if you’re a Canadian resident selling real estate located in the United States, you may be subject to a percentage of withholding of the total sales price. It can be a significant 15% of the purchase price.
Don’t worry there are ways to reduce this withholding tax and in some circumstance be exempt from it.
What is the FIRPTA withholding rate?
With few exceptions, the purchaser is required to withhold and pay a tax of up to 15% of the total selling price to the Internal Revenue Service (IRS) on the seller’s behalf. A 10% withholding rate applies when the purchase price is between US$300,000 and US$1 million.
Generally, no FIRPTA withholding is required if
- the sales price is less than US$300,000;
- the purchaser plans to use the property as a residence; and
- the purchaser is an individual.
How does it work?
Once the transaction is complete the IRS places the responsibility of withholding on the buyer. The buyer will withhold up to 15% of the total sales price and give it to the IRS. Upon filing your US Income Tax Return in the following year, any money withheld will be used for the taxes owing from the sale.
The withholding tax can be viewed as an incentive to comply with your US tax reporting obligation truthfully and promptly so you, the seller, can recapture these funds.
Rules for sellers if FIRPTA withholding is required:
To recover amounts withheld:
File a US Income Tax Return using Form 1040NR to report the sale of the real estate and pay tax on any capital gains from the sale of the property. When you file Form 1040NR the withholding tax is used as a credit against any income tax owing from the sale. Any remaining amount will be returned.
To reduced the FIRPTA withholding amount:
Apply to the IRS for a withholding certificate using Form 8288-B to reduce the withholding tax. You are eligible for the certificate if the total amount of income tax due is anticipated to be less than the withholding amount. Form 8288-B must be filed with the IRS prior to the date of sale and the buyer must be infromed you applied for a FIRPTA certificate.
Timing and detail are important to recover your funds promptly.
Contact us to learn more about how FIRPTA affects your unique situation.