Selling a US Rental Property as a Canadian: FIRPTA, US Tax and Canadian Tax

The sale is where cross-border ownership gets expensive if nobody planned for it. Three layers apply to a Canadian selling a US rental: withholding at closing, US tax on the gain, and Canadian tax on the same gain with a credit for what you paid in the US. This post is general information, so confirm the details with a cross-border accountant before you list.

Layer 1: FIRPTA withholding at closing

When a foreign person sells US real estate, the buyer has to withhold part of the price and send it to the IRS. That's FIRPTA. For a rental the usual rate is 15% of the gross sale price. Lower rates, 10% or none, only apply when the buyer plans to live in the home and the price is under certain limits.

The withholding is on the price, not your profit. Selling for US$200,000 means the buyer holds back US$30,000, even though your actual US tax on a gain of about US$62,000 will likely be well under that. You get the excess back by filing a US return, which can take months.

Reducing the withholding

You can apply to the IRS for a withholding certificate on Form 8288-B, which sets the withholding to your expected tax. Submit it before closing and tell the title company. The IRS can take months to respond, and the buyer may hold the money while it decides. Start when you sign the contract.

You'll also need an ITIN, so the withheld tax is credited to you. If you've owned the property for years and filed returns, you probably have one already.

Layer 2: US tax on the gain

You report the sale on a US return (Form 1040-NR). The gain is the sale price minus your cost basis, which is the purchase price plus improvements minus the depreciation you took or could have taken. Long-term gains are taxed at capital gains rates, but the part of the gain that comes from depreciation is taxed at up to 25%. This is why keeping depreciation records matters. The withholding is credited against this bill, and anything extra is refunded.

Layer 3: Canadian tax on the same sale

Canada taxes the gain too. You calculate it in Canadian dollars, using the exchange rate on the day you bought and the day you sold. That means the currency move counts. A property that gained 20% in US dollars can show a smaller or larger gain in Canadian dollars. At the moment, 50% of a capital gain is included in Canadian taxable income. The principal residence exemption doesn't cover a property you bought only to rent, though a former home you later rented can still qualify for some years.

You then claim a foreign tax credit for the US tax you paid on the sale, using form T2209. If the US tax is lower than the Canadian tax, you owe the difference to Canada. If you claimed capital cost allowance in Canada, the CRA can recapture it as income, so ask whether that applies to you.

An illustrative sale

You bought for US$150,000 and sell for US$200,000, with about US$4,364 a year of depreciation over five years (US$21,820 total, a round figure, since the first and last years are partial) and US$10,000 in selling costs.

• Adjusted basis: US$150,000 minus US$21,820 = US$128,180
• Amount realized after costs: US$190,000
• Gain: about US$61,820, of which US$21,820 is depreciation recapture taxed at up to 25%

Under FIRPTA the buyer withholds US$30,000. The actual US tax on this gain would be much smaller, so you'd expect a refund when you file, or a lower amount held if you got the 8288-B certificate in time. The Canadian calculation uses your Canadian-dollar cost and proceeds, and the US tax paid becomes a credit. Your numbers depend on your income and the exchange rates, so this is only a picture of the mechanics.

Plan the exit when you buy

A few choices at purchase make the sale smoother:

• Keep the closing statement, improvement receipts and every year's depreciation schedule.
• Know whether you hold the property personally or through a structure, since that changes the withholding and the Canadian treatment. See personal, LLC or corporate ownership.
• Hold the funds from the sale in the US until you know the withholding, rather than assuming a full payout.
• Decide how you'll convert the proceeds, and compare the cost of different providers, as in funding a US rental from Canada.

If you're still deciding where to buy, the state comparison shows which states add a state tax on the gain.