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With U.S. real estate values rising in recent years, more Canadians are looking to lock in their gain by selling their U.S. vacation property.
Many people are also unable to travel to their property or may be looking to upgrade or downsize and have decided that now is the time to sell. Whatever the reason for selling, there are a few things that Canadians should know before listing their property for sale.
You will need to file a U.S. tax return to report the gain. In addition to the gain being reported in Canada, sellers are often surprised to learn they also need to file a U.S. tax return. For U.S. property, the U.S. is entitled to collect tax first and a foreign tax credit may be available for the U.S. tax paid to help offset the Canadian tax payable.
When a non-resident sells a U.S. property, 15 per cent of the gross proceeds must be withheld by the buyer and remitted to the Internal Revenue Service (IRS) within 20 days of the closing date unless the seller has applied for a waiver.
Depending on the value of the property and whether the buyer intends to use the property personally, the tax withheld may be reduced to 10 per cent or even zero. To reduce the tax withheld, the seller must apply for a withholding certificate once the contract is signed which must include the seller’s U.S. Individual Tax Identification Number (which you will need to apply for if you don’t already have one).
The Canadian resident must file a U.S. tax return as a non-resident to report the disposition of the U.S. property and claim a refund for any excess tax withheld. Depending on the state where the property is located, tax may have to be withheld by the buyer and remitted to the state and the seller may be required to also file a state tax return.
Canadian residents are subject to tax on their world-wide income which includes any gains realized on the sale of the U.S. property. The gain that is reported in Canada could include a foreign exchange gain or loss if the value of the Canadian dollar has depreciated or appreciated relative to the U.S. dollar since the property was purchased.
The principal residence exemption may be used to shelter the gain realized for Canadian purposes but then the U.S. tax that is paid cannot be claimed as a foreign tax credit and is effectively lost. Only one residence can be claimed as a principal residence per family and usually the exemption is used for the property with the largest average gain per year, but if the U.S. tax cannot be recovered, the seller may want to preserve the exemption for a property that can be fully sheltered.
Most importantly, you need to plan ahead. Canadians who are looking to sell their U.S. property should:
• Consider applying for an US ITIN if they don’t have one already. Those who have been renting their property should have been filing a U.S. return to report their rental income and would already have an ITIN.
• Understand that the buyer may be required to withhold up to 15 per cent of the gross proceeds, unless a waiver can be obtained, and remit this tax to the IRS and that any excess over the U.S. tax payable will only be refunded once a U.S. tax return is filed. Depending on the time of the sale, the seller may have to wait up to a year to apply for this refund.
• Speak to a tax advisor about the Canadian and U.S. consequences of selling prior to
listing the property for sale to help mitigate the potential exposure to double tax and to understand their tax filing reporting obligations on both sides of the border.
• Be aware that the notarization requirements to complete the sale may require that
the Canadian travels to the U.S. or visits the nearest U.S. embassy or consulate.
It is important to have an experienced cross-border advisor help navigate these issues so that the sale process is as smooth as possible. This column covers the key issues of things that need to be considered but there are many other details that you need to be aware of.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.
