Canadians Selling U.S. Property (Real Estate): The Snowbirds’ Guide
The sale of your U.S. property is governed by the Foreign Investment in Real Property Tax Act (FIRPTA), a U.S. federal law. It is enforced by the IRS to ensure the collection of tax obligations from the disposition of property by foreign persons. In most cases, this applies to Canadians selling vacation property.
Note: Dispositions include not only a sale, but also an exchange, liquidation, gift, transfer, or redemption. The steps below refer to a sale, which is the most common disposition of U.S. property.
Steps in Selling Your U.S. Property
1 List Your Property For Sale & Accept An Offer
After you have listed your property with a realtor, you will next choose a title/escrow company that has experience working with Canadian sellers and with the FIRPTA requirements.
The title or escrow company will, in most cases, work on the transaction with both you and the purchaser. The IRS stipulates that the purchaser acts as their withholding agent to ensure that a sufficient amount will be withheld to satisfy the ultimate taxes payable.
Once you have accepted an offer, and the conditions and contingencies have been removed, you are ready for the next step.
2Determine Your FIRPTA Withholding Rates & Exemptions
To make sure that the IRS is able to collect any taxes owing, the buyer is designated as the withholding agent. The buyer’s responsibility is to withhold the required amount from the purchase price and remit that amount to the IRS.
Refer to withholding rates or exemptions to determine which of the four scenarios applies to your sale.
3 Prepare and File All FIRPTA Compliance Forms
After all conditions and contingencies have been removed and the sale is firm, the relevant FIRPTA compliance forms need to be completed. This must be done prior to closing.
If the buyer is an individual and intends to use the property as a principal residence, he/she may sign an affidavit to this effect. This might result in an exemption from, or reduction of, the amount withheld. The sale will close once this process has been completed.
4Prepare the Required FIRPTA Withholding Forms
Canadian residents are required to report the sale of U.S. property to the IRS using Forms 8288, 8288-A, and 8288-B.
Forms 8288 and 8288-A are mandatory for all sales. If your sale qualifies for a reduction of, or exemption from, the amount prescribed by the IRS, you may apply for this reduction/exemption using Form 8288-B.
5 ITIN Number Requirement
An Individual Tax Identification Number (ITIN) is required by all Canadians and non-U.S. residents before filing their U.S. federal and state tax returns. The amount withheld from your sale cannot be properly applied, and possibly refunded, to your account until your tax returns are filed.
If you already have a valid ITIN, the IRS will do the following:
- Verify the withholding details provided and the cheque received from your title/escrow company.
- Apply the amount withheld to your tax account using your ITIN.
- Issue and send you a final tax slip (Form 8288-A) that will include a locator number. You must have this slip in order to file your U.S. tax returns.
If you do not currently have a valid ITIN:
- It is crucial that you apply for it as soon as possible after your sale has closed. According to the IRS, “You will receive a letter from the IRS assigning your tax identification number usually within seven weeks if you qualify for an ITIN and your application is complete.” In our experience however, it usually takes about 11-12 weeks.
- The withholding amount (see withholding rates and exemptions) will not be applied to your account until your ITIN has been assigned and you have notified the IRS of your newly issued ITIN.
You will then receive a final tax slip (Form 8288-A) from the IRS. that will include a locator number. You must have this slip before filing your U.S. tax returns.
6File All Tax Returns
Each of the sellers is required to individually file these tax returns:
- U.S. federal personal income tax return.
- U.S. state personal income tax return. Note: Some states have no state tax.
- Canadian personal tax return.
You may be eligible to claim a foreign tax credit on your Canadian return if you paid U.S. tax. The CRA may ask for documentation of your payment and IRS transcripts for your claim to be allowed.
Let the Eager Beavers Handle the Entire FIRPTA Process for You
Sit back and relax, and let us chew away at your transaction from start to finish. To make it as easy as possible for you, we can work with you in person or virtually or a combination of both. As your fellow Canadians, we won’t let you down.
Contact us today to start the process, and we’ll respond within two business days, unless it is tax season as we may take a bit longer.