FIRPTA Withholding Tax Tips: Understanding Tax Implications for Canadian Individuals Selling U.S. Real Property
When it comes to selling property across the border, Canadian individuals should be aware of the tax implications. If you’re a Canadian resident planning to sell an income-producing property located within the United States, “FIRPTA Withholding Tax Tips” are essential to consider. You will be subject to a non-resident withholding tax of either 10% or 15% of the sale price. This is identified under FIRPTA (the “Foreign Investment in Real Property Tax Act” of 1980). The FIRPTA withholding tax is akin to a deposit that the Internal Revenue Service imposes on the sale of U.S. real property by a non-U.S. resident.
Fortunately, with certain expectations, a reduction or an elimination of the FIRPTA withholding tax is possible!
Under FIRPTA, a Canadian resident selling property in the United States is liable to a withholding tax of 10% or 15% of the total selling price. For a transaction to be subject to the minimum withholding rate of 10%, the real estate must be sold for more than US$300,000 but less than US$1,000,000. Not only that, the purchaser must sign an affidavit declaring the property will be their primary residence.
Two Permissible Exceptions
There are two permissible exceptions that make it possible to reduce or eliminate the tax withholding:
Elimination:
Complete elimination of FIRPTA withholding tax is possible when the sale of the property is less than US$300,000. On top of that, the property will be used for personal use purposes by the buyer.
Reduction:
In this method, the seller comes into play! One can reduce the FIRPTA withholding tax by applying for a clearance certificate from the Internal Revenue Service (IRS). There are four requirements when applying for this certificate:
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- File Form 8288-B with the IRS
- This form needs to be completed within 20 days of the sale date
- The buyer must be informed regarding this FIRPTA certificate
- The U.S. Individual Tax Identification Number (ITIN) is required with Form 8288-B; you can apply for one by completing Form W-7 and send it to the IRS with Form 8288-B
If the certificate is approved, the decreased withholding amount will be equivalent to the highest possible tax rate on the capital gain. The IRS will generally process a withholding certificate application within 90 days of submission.
Canadian residents are subject to Canadian income tax on any worldwide income. This includes the capital gains or losses on the sale of U.S. real estate or property. Within a year of the sale, Canadian residents are required to file Form 1040NR (U.S. Non-Resident Income Tax Return). They need to do this prior to filing their Canadian individual tax return to get the benefits of any allowable deductions or credits permitted under the Canada – United States Tax Treaty.
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