At some point, purchasing a property in the United States likely seemed like a great idea. Maybe you were hoping to have a place to hang your hat during trips through the country. Maybe you were hoping to take advantage of a robust rental climate. Either way, unless you decide to move full-time to the United States, you’ll eventually need to sell your home. When that happens, it is essential to do your homework and know what you’re getting into.
Table of Contents - What to Know When Selling Your United States Investment Property
This may not come as a surprise since you’ve already been through the long process of buying a home in the United States as a Canadian citizen. It is a tedious and exhaustive process. Unfortunately, the sales portion of owning your own home doesn’t go much faster. As a result, once you’ve decided to sell your home in the US, it’s a good idea to simply accept the fact that it’s going to take months—if you’re looking for emergency cash, this is not the best route.
The United States and Canada are partners
If that sounds like a whole lot of taxation on the sale of your property, there is help. The Convention Between Canada and the United States of America was first signed in Washington, DC, in September of 1980. Its purpose was two-fold. The first was to prevent citizens of either nation from avoiding their tax obligation. The second was to prevent heaping double taxation on those who were residents of either the United States or Canada.
In short, the Convention Between Canada and the United States of America was designed to make it easier to conduct business between the two nations.
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The role of capital gains
If your United States property has appreciated since you bought it, then you will be subjected to a tax on the difference in value in both Canada and the US. This is known as the capital gains tax. If, for example, you purchased a home years ago for the price of $400,000, and then you sold it for $600,000, the capital gains tax would apply to the $200K in profit you collected from the sale.
Think of your capital gains as the principal amount on which you will be taxed. Your priority is to the United States’ Internal Revenue Service. You’ll have to file Form 1040NR (a non-resident form) to declare the sale.
Here comes FIRPTA
As a Canadian resident, the sale of your home falls under the purview of the Foreign Investment in Real Property Tax Act (FIRPTA). It’s important to understand that FIRPTA is not a tax. It is a program that withholds a portion of your home’s sale price until taxes can be taken out. The amount that the seller is taxed under FIRPTA changes depending on the value of the house.
The goal of FIRPTA is to standardize the exchange of property between residents of the United States and those people hoping to purchase property in the US.
Taxes for individuals
As you can imagine, the capital gains taxes on your property will shift depending on the overall income you receive. Specifically, if your US property sells for less than $300,000, and the buyer intends to use the property as their primary residence (i.e., they’re going to live there 51 percent of the time), then you may be exempt from the capital gains tax altogether.
If your US property sells for between $300,000 and a million dollars, then the most likely outcome is that a 10 percent capital gains tax will be applied to the sale. If the property’s value exceeds a million dollars, then the typical tax amount is bumped up to 15 percent.
Do you merit a withholding certificate?
As you can imagine, working with a foreign government can be fairly time-consuming. If you think that your tax penalty will clock in at less than 15 percent of your property’s value, however, there is a way that you can speed up the process. It’s known as a Withholding Certificate.
When a seller files a Withholding Certificate (Form 8288-B) with the IRS, they agree to place 15 percent of the property’s selling price in escrow. Once the IRS has processed your Withholding Certificate (which usually takes about 90 days), they will return your money minus any taxes that the Internal Revenue Service deemed necessary.
The key to successfully applying for a Withholding Certificate is filing early. Even though the typical turnaround time is about 90 days, it could take longer. What’s more, a Withholding Certificate needs to be submitted before you close on your home. In other words, if you think you’re eligible, you should apply for a Withholding Certificate with the IRS early in the sales process.
Get help from a professional
You may be the kind of person who is inclined to handle paperwork and finances on your own. That is often doubly true for people who have invested in real estate. Selling a property in the United States, however, isn’t a task to handle solo unless you happen to be a lawyer, an accountant and a real estate agent. Even then, it’s not advisable.
Enlisting the help of a professional to guide you through the sales process will not only reduce your stress and ease your time commitment to the project, but it will also prepare you for the potential onslaught of local guidelines that govern the sale of a home.
See, the above information can serve as a great starting point when you’re about to sell your home in the United States. Still, there is a sea of knowledge outside the general federal guidelines explored above. Each state in the US has its regulations and taxes that are levied against the seller of a home. A local financial expert can help navigate those obstacles from a stance of experience.
Tax Implications of Canadians Selling Property in the U.S.
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