Will Canadian Homeowners Face Capital Gains?

Yes, foreign nationals are subject to US capital gains taxes on real estate sales.

Because the US Internal Revenue Service (IRS) can’t easily go after foreign nationals to collect this capital gains tax, there are special US tax “withholding” requirements when foreign nationals sell real estate.

If a Canadian sells real estate located in the US, a withholding tax of 10% of the gross sales price is normally payable under the FIRPTA (the Foreign Investment in Real Property Tax Act of 1980). The tax withheld can be offset against the US income tax payable on any gain realized on the sale, and refunded if it exceeds the tax liability. The 10% withholding requirement on the gross sales price applies regardless of the sellers adjusted basis in the property.

There are two exceptions to FIRPTAs 10% withholding requirement, which may reduce or eliminate the requirement.

  1. Exception 1: Sales price less than US $300,000. First, withholding under FIRPTA will not apply if the property is sold for less than US $300,000, and the purchaser intends to use it as a principal residence. The buyer need not be a US resident. For this exception to apply, the purchaser must have definite plans to reside at the property for at least half of the time that the property is in use during each of the two years following the sale. However, the gain on the sale will still be taxable in the US, and the US tax return must there be filed. Thus, if a Canadian is selling a Florida condo or any other US real estate, for less than US $300,000 to a buyer who intends to occupy it as a principal residence, the seller will receive the full purchase price rather than having 10% withheld by the buyer and remitted to the IRS.
  2. Exception 2: Withholding certificate. The second exception allows for reduced, or eliminated withholding, where the Canadian obtains a withholding certificate from the IRS on the basis that the expected US tax liability will be less than 10% of the sales price. The certificate will indicate what amount of tax that should be withheld by the purchaser rather than the full 10%. A withholding certificate issued after the transfer of the property may allow the seller to receive an early refund.

Interested sellers should contact an accountant or lawyer for details.