U.S. Tax Returns
Canadians Selling U.S. Property: Filing a U.S. Tax Return
Canadians who dispose of U.S. property are subject to The Foreign Investment in Real Property Act (FIRPTA). FIRPTA is the U.S. federal law that applies a withholding tax on the sale of U.S real property by non-U.S. residents. It is enforced by the IRS as a means for the U.S. government to collect potential tax due on the sale of U.S. property by Canadians and other U.S. non-residents.
A disposition refers not only to a sale but also to any other type of transaction such as a liquidation, gift, exchange, or other transfers of the property. Real property includes any U.S. real estate, including vacation property, disposed of by any U.S. non-residents.
1 Determine Your Wittholding Rate & Capital Gain or Loss
The default withholding rate is 15% of the capital gain, but in certain cases, you may qualify for an exemption or reduction of this rate.
- Learn more about withholding rates and exemptions.
- Learn more about calculating your capital gain or loss.
2 Ensure the FIRPTA Compliance Forms are completed & Submitted
These forms, along with a cheque for the withholding amount, are completed and submitted to the IRS by the buyers or buyers’ agent:
- Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests. This form is used to report the sale, the buyer information, and the required withholding tax on the sale of your property.
- Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests. This form is prepared by the withholding agent for each seller (each person on title) of the property. The forms and cheque must be remitted to the IRS within 20 days.
- Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests. This form is used if you qualify for an exemption or reduction of the withholding tax. Once the IRS has adjudicated and rendered a decision, form 8288-A must be completed for the amount determined by the IRS, and a cheque for the withholding amount must be remitted within 20 days.
3 Individual Taxpayer Identification Number (ITIN)
Each individual on title requires an ITIN to file U.S. tax returns and properly apply any withholding taxes to their accounts.
- Already have an ITIN?: The IRS will validate the FIRPTA withholding and your payment, apply the tax to your ITIN, and issue a final tax slip.
- Don’t have an ITIN?: You should apply for one as soon as possible after the closing of the sale since the process takes approximately 12 weeks to process. You will need to provide the IRS with your passport, or two other documents proving your identity, along with the substantiating documentation. Alternatively, we can assist with the certification of your passport and identity and prepare the application with all necessary supporting documentation.
Filing Your Non-Resident U.S. Tax Returns
Once you have an ITIN, you must communicate the ITIN to the IRS. The withholding tax will then be applied to your tax account, and the IRS will subsequently mail you a final tax slip. At this point you are ready to file the following tax returns:
- Form 1040-NR, U.S. Nonresident Alien Income Tax Return.
- Personal tax return for the applicable state, if applicable. Some states do not have state income tax.
U.S. tax returns should be completed prior to filing Canadian tax returns. Documentation and information required to file your U.S. tax return includes:
- Your ITIN Number
- Copy of the final 8288-A with the stamped control number across the top
- Final Settlement statement (sale of property)
- Final Settlement statement (purchase of property)
- Any capital (structural) improvements made during the ownership of the property
- Number of days each person was physically present in the U.S. for any reason for the preceding three years
Tax Rates on Capital Gains
There are three factors that determine your tax rate:
- The length of time you owned the property prior to the sale. If you owned the property for a year or less, it will be considered a short-term capital gain and will be taxed as ordinary income. If you owned the property for more than a year, the gain will be considered a long-term capital gain and taxed at preferential rates.
- Your total U.S. income. For long-term capital gains, the rate is typically 20% or under. For short-terms gains, the rates range from 10% to 37%.
- The property’s use. In the majority of cases Canadians are selling vacation properties, in which case the rates above are applicable. You may be eligible for a tax exemption under certain tests, or if you are also a U.S. resident or citizen.
Up to $250,000 U.S. of the capital gain may be excluded for each taxpayer if the property qualifies as a principal residence located in the U.S. You must own the residence and have used it as your main residence for at least two of the five years prior to the sale.
U.S. Tax Return Deadline
The general deadline for individuals is April 15 in the year following your tax year end, typically the end of the calendar year.
If necessary, you may apply for an extension by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. However, this extension is only for filing your U.S. tax return. If any amount of tax is payable, the deadline for payment remains April 15.
It’s Not as Simple as You Thought, Eh?
With years of experience in U.S. tax and helping Canadians deal with all matters related to the sale of your U.S. property, we know the process inside and out and are your U.S. tax experts.
Both our managing partner, Asif, and our lead, Jeanine, is an Enrolled Agent (EA), admitted to practice before the IRS. Asif is also a Certifying Acceptance Agent (CAA) for the IRS. A CAA can simplify the process of obtaining an ITIN number by certifying your identity documents, saving you from sending your original documents to the IRS.
Get Started With US Taxes Today
Our services can be provided in person or virtually through our two offices, located in Calgary and Toronto. Contact us to start the process!
