Canadians are continuing to invest in the red hot real estate market. But what they don’t realize is the amount of taxes to be paid when the US situated property is eventually sold. In this blog, I will cover the basic taxes for Canadians selling property in the US.
- A ten percent withholding tax will be imposed on the gross selling price. For example, if you are a Canadian who sells a US real estate property for $700,000 then the title insurance company will automatically withhold 10% or $70,000. Even if you lost money on the sale, the withholding tax still applies.
- To avoid paying the 10% withholding tax, you should have your cross border tax accountant (about page) file form 8288B with the IRS. This form asks the IRS to reduce the withholding tax from 10% of the gross sales amount to the actual tax liability you will incur upon the sale. The actual US tax liability is equal to 20% of the capital gain being the difference between the sales amount and the amount you initially paid to acquire the property. For example, if you made $100,000 profit on the sale of US property, then your actual tax liability will be approximately $20,000.
- It is important that you file Form 8288B as soon as possible because it can take up to 90 days for the IRS to process the form. Once the form has been approved by the IRS, submit the approval letter to your title insurance company. The title insurance company will then remit the actual amount of the tax liability on the capital gain to the IRS and refund the excess taxes withheld directly to you.
- Make sure you keep receipts for all renovations made to the property. This is because renovations made prior to the sale increases the adjusted cost base of the property and reduces the resulting capital gain. The receipts for the renovations made should be submitted with form 8288B to the IRS.
- If you don’t already have a US tax ID number, then complete Form W7. This form should be submitted with Form 8288B to the IRS.
- You must file a US non-resident tax return Form 1040NR to the IRS by June 15 following the year of sale. This tax return reports the capital gain realized, the taxes remitted to the IRS and the tax refund due to you, or tax balance owing.
- You can claim a foreign tax credit on your Canadian tax return for the US taxes paid. This avoids paying double tax twice.
Here is the tip: before selling US property, make sure to consider the US and Canadian tax implications, as well as completing form 8288B ASAP.
About the Author – Allan Madan
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation . Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.
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The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.