There are tax implications when selling a property located in the U.S. that you need to be aware of to avoid unpleasant surprises.
When a Canadian resident sells U.S. real property, whether it is in Florida or elsewhere, withholding tax of 15% of the sale price is payable. For example, a home that sells for US$400,000 would require that US$60,000 be remitted to the Internal Revenue Service (IRS). This amount is collected from the sale price at the time of the transaction, either by the buyer or the agent, and then remitted to the IRS.
However, there are exceptions. The withholding tax does not apply if the sale is for less than US$300,000 (or it is reduced to 10% in the case of a sale between US$300,000 and US$1M) and the purchaser signs an affidavit stating that the new property will be a principal residence that will be occupied at least 50% of the time during the two years following the purchase.
The IRS applies this requirement under the Foreign Investment in Real Property Tax Act (FIRPTA) to ensure that the seller does not avoid its tax obligations in the U.S.
The good news is that the property seller will be able to recover some, if not all, of the withholding tax that was paid at the time of the transaction.
Recovering the tax withheld
The rate of 15% of the sale price is generally higher than the effective U.S. tax rate, which is between 0% and 20% of the capital gain. The seller may therefore obtain a refund for any amount already paid in excess of the actual tax due.
In order to recover the funds, the seller will have to file a U.S. income tax return, which will show the capital gain on the sale of the property. The funds withheld for FIRPTA will then be deducted from the tax liability and the balance will be refunded.
Note that the seller will, in all cases, have to file a US tax return even if he has benefited from the exemption from the 15% withholding tax as described above.
The sale of real property in the U.S. does not relieve Canadian residents of their obligation to report the transaction and pay tax on the capital gain in Canada. However, the Canada – United States tax treaty makes it possible to avoid double taxation.
What forms are required?
Naturally, there are tax forms to be completed for this process. The 15% withholding tax is remitted to the IRS usingforms 8288 and 8288-A. Once the forms have been processed and the withholding tax received, the IRS will remit a stamped copy of form 8288-A, which the seller needs to file the U.S. income tax return.
At the time of the sale, the seller must obtain an ITIN (Individual Taxpayer Identification Number). Equivalent to the social insurance number in Canada, this number is mandatory for the 8288 and 8288A forms to be processed and will be needed later to file a U.S. income tax return in order to recover some or all of the 15% withholding.
Canadianpassportcertification
The application to obtain an ITIN must be accompanied by a certified copy of your passport. Certification by Passport Canada can take weeks or even months. Furthermore, you will not have your passport during this time since it must be sent to Passport Canada for certification. The good news is that Raymond Chabot Grant Thornton is accredited by the U.S. tax authorities to certify Canadian passports the same day they are requested.
Our cross-border tax experts are also available to prepare the prescribed tax forms and the U.S. and Canadian tax returns simultaneously.
In short, it is in your best interest to consult aninternational tax expertwith in-depth knowledge of both countries’ tax rules in order to avoid unpleasant surprises or long delays. This expert will be better able to accompany you in order to not only minimize the financial impact of the sale of real property in the U.S., but also recover your money as efficiently and quickly as possible.
FAQs
In general, when a homeowner sells their primary residence in Florida, they are not subject to federal capital gains tax if they have lived there for at least two years and used the home as their primary residence.
How much tax do I pay if I sell my house in Florida? ›
Capital gains tax. If you sell your Florida home for more than you paid for it, the profit may be subject to a federal capital gains tax. Because Florida doesn't tax income, you won't be subject to an additional state capital gains tax.
How does selling your primary residence affect taxes? ›
It depends on how long you owned and lived in the home before the sale and how much profit you made. If you owned and lived in the place for two of the five years before the sale, then up to $250,000 of profit is tax-free. If you are married and file a joint return, the tax-free amount doubles to $500,000.
How to avoid taxes after selling a house? ›
You can avoid capital gains tax when you sell your primary residence by buying another house and using the 121 home sale exclusion. In addition, the 1031 like-kind exchange allows investors to defer taxes when they reinvest the proceeds from the sale of an investment property into another investment property.
At what age do you stop paying property taxes in Florida? ›
You are 65 years of age, or older, on January 1; You qualify for, and receive, the Florida Homestead Exemption; Your total 'Household Adjusted Gross Income' for everyone who lives on the property cannot exceed statutory limits.
Do you have to pay capital gains after age 70? ›
Since there is no age exemption to capital gains taxes, it's crucial to understand the difference between short-term and long-term capital gains so you can manage your tax planning in retirement.
How much do you pay the IRS when you sell a house? ›
If you sell a house or property in one year or less after owning it, the short-term capital gains is taxed as ordinary income, which could be as high as 37 percent. Long-term capital gains for properties you owned for over a year are taxed at 0 percent, 15 percent or 20 percent depending on your income tax bracket.
What is the 2 out of 5 year rule? ›
To qualify for the principal residence exclusion, you must have owned and lived in the property as your primary residence for two out of the five years immediately preceding the sale. Some exceptions apply for those who become disabled, die, or must relocate for reasons of health or work, among other situations.
How long do you have to reinvest money after selling a house? ›
As long as you sell your first investment property and apply your profits to the purchase of a new investment property within 180 days, you can defer taxes. You might have to place your funds in an escrow account to qualify.
At what age do you no longer have to pay capital gains? ›
Capital Gains Tax for People Over 65. For individuals over 65, capital gains tax applies at 0% for long-term gains on assets held over a year and 15% for short-term gains under a year. Despite age, the IRS determines tax based on asset sale profits, with no special breaks for those 65 and older.
There is no state capital gains tax in Florida, as the state has no state income tax at all. This applies even if you live out of state and own a summer home in Florida. But you are still subject to federal capital gains taxes when you sell your property.
Is money from the sale of a house considered income? ›
Taxpayers who don't qualify to exclude all of the taxable gain from their income must report the gain from the sale of their home when they file their tax return. Anyone who chooses not to claim the exclusion must report the taxable gain on their tax return.
What happens if you sell a house and don't buy another? ›
Understanding the Potential Cost of Capital Gains Tax. Selling a house without buying a house can provide a windfall of cash to the seller. However, the seller could be in for a rude awakening at tax time depending on the circ*mstances and the amount of profit. This is due to capital gains.
Do I have to report the sale of my home to the IRS? ›
Report the sale or exchange of your main home on Form 8949, Sale and Other Dispositions of Capital Assets, if: You have a gain and do not qualify to exclude all of it, You have a gain and choose not to exclude it, or. You received a Form 1099-S.
What is the 6 year rule? ›
If you use your former home to produce income (for example, you rent it out or make it available for rent), you can choose to treat it as your main residence for up to 6 years after you stop living in it. This is sometimes called the '6-year rule'. You can choose when to stop the period covered by your choice.
How do I exclude capital gains from sale of my home? ›
The seller must have owned the home and used it as their principal residence for two out of the last five years (up to the date of closing). The two years do not have to be consecutive to qualify. The seller must not have sold a home in the last two years and claimed the capital gains tax exclusion.
What can be deducted from capital gains when selling a house? ›
5 Tax Deductions to Take When Selling a Home
- Selling costs.
- Home improvements and repairs.
- Property taxes.
- Mortgage interest.
- Capital gains tax.
Do I Pay Capital Gains if I Reinvest the Proceeds From the Sale? While you'll still be obligated to pay capital gains after reinvesting proceeds from a sale, you can defer them. Reinvesting in a similar real estate investment property defers your earnings as well as your tax liabilities.
What is the 6 year rule for capital gains tax? ›
Here's how it works: Taxpayers can claim a full capital gains tax exemption for their principal place of residence (PPOR). They also can claim this exemption for up to six years if they move out of their PPOR and then rent it out. There are some qualifying conditions for leaving your principal place of residence.
