Tax Planning Accountants: Selling U.S. Property

All owners of U.S. real property must pay income tax on the gain on the sale of that property, regardless of where they normally reside or pay tax. If you are not a U.S. citizen, the IRS imposes withholding tax on the proceeds of the sale of a U.S. real property. Without the withholding, the IRS could find it difficult to locate you should you fail to file or pay the tax on the sale. 

The IRS requires the buyer of your property to act as its agent and collect and remit the withholding tax. U.S. title agents understand this requirement and will determine whether you’re a foreign seller in order to protect the buyer. The purchaser/title agent will remit the withholding tax will remit the withholding tax on or with Form 8288 – U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests.

The amount of the withholding tax is 15 per cent of the proceeds of the sale unless the buyer is an individual planning to reside in the property for two years after the sale, in which case:

• If the sale price is between US$300,000 and US$1,000,000, withholding may be reduced to 10 per cent.
• If the sale price is under US$300,000, there is no withholding tax requirement.

The buyer must certify her or his intent to reside in the property for either of these two exemptions.

You may also apply for a reduction of, or exemption from, withholding tax if you expect the tax on this capital gain to be less than the amount of tax withheld. The application must be in progress by the sale closing date, and the title agent may hold the entire withholding in escrow pending a response from the IRS.

U.S. Withholding Tax is payable by non-U.S. citizens (including Canadians) selling U.S. property, and it serves as a mechanism for the U.S. Internal Revenue Service (IRS) to ensure U.S. taxes are collected from and paid by non-resident sellers. The withholding tax is typically 15% of the gross sales price, and it is withheld by the buyer or a withholding agent at the time of the sale. The seller can later file a U.S. tax return to claim any excess withholding as a refund if the actual tax liability is lower.

The withholding tax is important because it ensures that the IRS collects taxes from non-resident sellers who may not have a physical presence in the U.S. and could potentially leave the country without paying the required taxes on the sale. It helps the U.S. government capture tax revenue from non-residents engaging in transactions involving U.S. property, thus supporting the integrity of the U.S. tax system.

The cross-border filing obligations of Canadians selling U.S. properties can be incredibly complex, and it is easy to make a mistake which can result in double taxation, and in some cases trouble at the border. Our Cross-Border Tax experts are here to help you make sure you get everything right. Here are some of the complications you may encounter.

You cannot claim the amount of withholding tax paid as a deduction on your Canadian tax return. You are required to file Form 1040NR U.S. Nonresident Alien Income Tax Return with the IRS to determine the actual amount of tax payable on the capital gain from the sale. If the withholding tax is greater than the tax payable, you will get a refund. You must provide your IRS-stamped copy of Form 8282 to support the tax withheld.

You will then file your Canadian tax return and report that capital gain on your return. The amount of taxes paid in the U.S. will be deducted as a foreign tax credit.

The CRA scrutinizes foreign tax credits and requires a significant amount of information to support the credit. More than 80 per cent of foreign tax credit claims are challenged by the CRA and it is costly to deal with the challenges.

To ensure you avoid these headaches, it’s best to work with an accountant who understands cross-border tax during the sale process to ensure that everything is done according to the IRS and CRA requirements.