The U.S. real estate market has been improving due to many Canadians selling their U.S. vacation properties. Because non-resident owners of U.S. property are subject to the Foreign Investment in Real Property Tax Act (FIRPTA) regulation, i.e. there is a 10% withholding requirement on the sale proceeds from the property.
In December, 2015, the U.S. government updated the FIRPTA regulation under the Tax Hikes Act (“PATH Act”) changing this withholding amount. Below is a brief overview of the updated FIRPTA regulation by AG Tax cross-border tax professionals, effective on sales closing on February 17th, 2016 or thereafter.
What is FIRPTA?
FIRPTA is a withholding tax requirement on the sale of a U.S. property sold by a non-resident.
Under the FIRPTA regulation, the buyer of a U.S. property needs to withhold and remit 10% of the sale proceeds to the U.S. Internal Revenue Service (IRS) at the time of payment if the seller of the U.S. property is a non U.S. resident person. This withholding is required on the gross sale amount regardless of any capital gain made on the sale of the property.
FIRPTA withholding is not required if:
- The purchase price is less than US$300,000 and if the buyer is able to provide an affidavit stating that the property will be used personally 50% of the time in the first 2 years of purchase.
Or
- If the seller obtains a withholding certificate from the IRS to withhold a lesser amount based on the actual capital gains tax or to not withhold any amount in case there is no capital gain on the sale.
Updated FIRPTA Regulation
Last year, on 18th of December, President Obama signed the Protecting American Taxpayers from Tax Hikes Act (“PATH Act”) which brought in changes to the FIRPTA regulation as well.
Based on the new regulation, the FIRPTA withholding requirement rate has been increased from 10% to 15%. This 15% withholding is required only on sale of those properties which have been purchased at US$1,000,000 or more. However, the 15% withholding can be required on certain properties, even if they were purchased at a price lower than US$1,000,000.
For sales under $300,000, the earlier mentioned rule of an affidavit applies, however if the buyer is not able to prove that the property will be used for personal purpose 50% of the time in the first two years then the 15% withholding rule will apply for these sales too.
In all cases the seller still has the opportunity to apply for a withholding certificate so that the actual amount being withheld and remitted to the IRS is not the 10% or 15%, but an amount closer to the actual tax realized on the sale of the property.
If you are a Canadian that has been thinking about selling your U.S. property, make sure to consult with a cross border tax specialist to discuss your options and receive proper advice on how to deal with these new changes to the withholding requirements.
AG Tax LLP Can Help
If you wish to discuss further on the above issue, or have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle even your most complex tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canadian, and other international tax laws.
We can assist with:
- Canadian Personal and Corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
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