4 Things to Be Aware of When Selling U.S. Property
If you’re a snowbird looking to sell property in the United States, you may be wondering what the tax and financial implications of your upcoming real estate transaction will be. Whether you are considering a change of lifestyle or cashing in on the appreciation of your U.S. property, it’s crucial to be prepared for the selling process.
Our guide explains considerations to be aware of when selling U.S. property as a Canadian snowbird. Please note, this information is intended as a high-level summary of considerations only. We recommend partnering with a knowledgeable real estate professional and cross-border tax or legal expert to navigate potential complexities.
1. You will have to pay U.S. Capital Gains Tax.
Selling your U.S. property subjects you to U.S. capital gains tax, even as a Canadian resident. U.S. tax filing involves reporting gains on a Non-Resident Income Tax Return (1040NR).
Rates vary based on ownership duration. Short-term capital gains tax applies if you are selling an asset you’ve held for less than a year, and are paid at the same rate as you’d pay on your ordinary income. Most snowbirds, however, will be subject to long-term capital gains tax, which is applied to assets held for more than a year, and are paid at rates of either 0 percent, 15 percent, or 20 percent, depending on your income. See the table below for a summary of how the long-term capital gains tax works depending on your filing status and income.
| FILING STATUS | 0% RATE | 15% RATE | 20% RATE |
|---|---|---|---|
| Single | Up to $44,625 | $44,626 – $492,300 | Over $492,300 |
| Married filing jointly | Up to $89,250 | $89,251 – $553,850 | Over $553,850 |
| Married filing separately | Up to $44,625 | $44,626 – $276,900 | Over $276,900 |
| Head of household | Up to $59,750 | $59,751 – $523,050 | Over $523,050 |
Source: Internal Revenue Service
For the 2024 tax year, the income thresholds for the long-term capital gains tax rates are slightly higher, to account for inflation.
| FILING STATUS | 0% RATE | 15% RATE | 20% RATE |
|---|---|---|---|
| Single | Up to $47,025 | $47,026 – $518,900 | Over $518,900 |
| Married filing jointly | Up to $94,050 | $94,051 – $583,750 | Over $583,750 |
| Married filing separately | Up to $47,025 | $47,026 – $291,850 | Over $291,850 |
| Head of household | Up to $63,000 | $63,001 – $551,350 | Over $551,350 |
Source: Internal Revenue Service
2. You will also have to report the sale on your Canadian tax return.
Canadian residents must report U.S. property sale gains or losses to the Canadian federal government in order to comply with income tax regulations. Specifically, this information will need to be reported to the Canadian Revenue Agency (CRA) on your next tax return.
3. You get to avoid double taxation thanks to the Canada-U.S. Tax Treaty.
Despite the fact that you have to report the sale to both U.S. and Canadian tax authorities, thankfully, the Canada-U.S. Tax Treaty is set up in such a way that you won’t have to pay twice as much. The treaty prevents double taxation by allowing a foreign tax credit for U.S. tax paid.
Qualification requires payment of U.S. taxes, and any balance may be due in Canada if Canadian taxes exceed U.S. taxes.
4. You will be subject to FIRPTA withholding rules.
FIRPTA, which stands for the Foreign Investment in Real Property Tax Act, mandates a 15% withholding on the sale price for Canadian residents. Essentially, 15% of what your property gets sold for will be remitted to the IRS. It’s important to note that this withholding is not an additional tax; rather, it acts as a deposit to ensure that you meet your U.S. tax obligations. Once your U.S. tax return is submitted, the IRS will refund the balance to you.
Another piece of good news: you might be able to reduce or eliminate the withholding requirement depending on your specific circumstances. For example, if the property sells for less than $300,000 — and the person who buys it intends to use it at least 50 per cent of the time for the next two years — then the withholding can be waived entirely. Alternatively, you can apply for a Withholding Certificate from the IRS using Form 8288-B, which allows your escrow agent to withhold the funds in place of the IRS, and which usually results in the balance being returned to you more quickly.
Conclusion
In conclusion, selling your U.S. property as a Canadian snowbird involves adhering to various rules and making necessary payments to the U.S. and Canadian governments. Advanced planning, including professional assistance from a real estate agent and a cross-border tax expert, can streamline the process, potentially saving you time and money. As with all things in life, it pays to get expert assistance so you don’t wind up with unexpected financial penalties!