In a previous segment we dealt with the problems that a Canadian resident might face when purchasing a US residential property. There are many reasons why an individual might purchase such a property varying from a desire to own a vacation property in the Sun Belt to taking advantage of a perceived investment opportunity. In any case there eventually may come a time when you decide to sell your US residential property. The regulations regarding the sale of US property can be decidedly different from anything you have previously experienced in Canada and it is important that nothing be inadvertently overlooked.
Capital Gains Tax On US Property Sale
When you sell a US residential property you are required to file a US income tax form and pay tax on the gain. If you do not already have a US tax identification number you will need to apply for one at this time. The gain is calculated on the depreciated value of a rental property or the difference between the purchase and sale prices of a residential property. You may be entitled to claim certain exemptions from capital gains depending on your particular circumstances.
Withholding Amounts and Form 8288-B When Selling US Property
In the United States the purchaser of a property is required to withhold 10% of the purchase price to be forwarded to the IRS to cover possible capital gains tax. If the tax owed to on the gain is less than the amount withheld you may file Form 8288-B in advance of the closing date to have the withholding taxes reduced to the actual taxes owing. Form 8288-B must be forwarded to the IRS on or before the date of the transfer of the property and the purchaser must be informed that the seller has applied for a lower withholding rate. If the application to reduce the withholding tax is approved the IRS will issue a withholding certificate. The buyer must withhold 10% of the selling price in trust until the seller receives the withholding certificate. The purchaser then has 20 days to pay the seller the amount withheld in excess of that required by the IRS.
If the tax owed is more than 10% of the selling price the seller must forward the balance owing to the IRS within 22 days of the closing date of the sale.
The IRS generally responds within 90 days to applications to reduce the required withholding amount. To ensure an efficient closing date the 8288-B ideally should be filed 90 days prior to the sale closing date. If the seller fails to file the necessary documentation with the IRS by the closing date the purchaser is required to forward the entire amount withheld to the IRS. The seller must then apply to receive the excess amount by way of tax refund.
Canadian residents intending to sell residential property in the United States should be aware the each state has similar and parallel laws that are not necessarily consistent state to state. The IRS does not act as a tax agent for individual states and each state must be dealt with individually according to the particular regulations applying to that state.
If you are planning to sell a US property it is important that you contact us even before you list the property for advice and assistance. We can offer immediate guidance on the different federal and state regulations that may effect you and assist you to find qualified realtors, escrow agents, appraisers, and other professionals in the area. We will estimate your tax liability based on the projected selling price and assist you in filing the necessary tax forms and other required documents to ensure that you receive the proceeds of the sale as quickly and efficiently as possible.
AG TAX LLP CAN HELP
If you have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with US and Canadian tax laws and can provide you the right guidance to handle your 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 US, Canadian, and other international tax laws. We can assist with:
- Canadian Personal and Corporate tax returns
- Cross Border Taxation and Business Planning
- US Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.