'Selling real estate in the US? 6 things Canadians should know.'

Published on February 24, 2022 - 7 min read

You may be ready to make a lifestyle change, or maybe you just want to realize proceeds from the rising value of your property in the United States. Whatever your reason for selling, it's important to know what to expect so you can prepare for the process. All of this can be complicated, so make sure you work with a real estate professional who has knowledge of the issues and a tax professional or lawyer versed in border crossing to make sure you don't get into difficulties with the IRS or CRA.

1. You will have to pay tax in the US1 on your profits.

This probably won't come as a surprise to you because the requirements are similar and''in Canada: if you sell your home for more than you bought it for, you are liable to pay tax on the difference, less certain expenses - known as capital gains tax. What you may not know is that when you sell real estate in the US, your tax liability goes to the first next state - even if you're a Canadian resident. If you've owned your property for at least a year, you're subject to long-term capital gains tax at one of the following rates (for 2022):

• 0% if you are a single taxpayer with taxable income of less than $39,376
• 15% if you are a single taxpayer with taxable income less than''$434551
• 20% if you are a single taxpayer with taxable income over $434,551

If you've owned your property for less than a year, capital gains tax is taxed the same as ordinary income earned in the United States. Filing and paying taxes in the U.S. is a fairly simple process: you need to report the gain (or loss) of your property on your U.S. 1040NR alien income tax return. If you had funds withheld under FIRPTA (see item 4), the tax due will be withheld from that amount and you will receive a refund of the balance.

2. You also need to report your gain to the Canadian government.

As a resident of Canada, you are required to pay income tax on your worldwide income''income - so the sale of your real estate in the U.S. and any gains or losses realized in doing so must be declared in both Canada and the U.S..

3. The Canada-U.S. tax treaty is on your side.

Luckily, the Canada-U.S. tax treaty is in place to prevent double taxation. Since the U.S. has the right to tax capital gains first, this U.S. tax liability can be recognized as an exclusive foreign tax credit against your Canadian and provincial tax liability. Just remember, to qualify for the foreign tax credit, you must pay taxes in the US. And if your Canadian taxes are higher than your U.S. taxes, you'll need to pay the difference in''Canada.

4. You are subject to the withholding rules

If you are a Canadian resident and you sell real estate in the United States, you are subject to withholding rules under the Foreign Investment in Real Property Tax Act (FIRPTA). These rules require that 15% of the sale price be remitted to the IRS at the time of sale. On the sale of a $500,000 property, this amounts to a whopping $75,000. This is not a tax, but a withholding for capital gains tax - essentially, it exists to ensure that your US income tax obligations are met, as the IRS withholds the funds until your US tax return is filed and processed, and then returns the balance to you.

Exceptions

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The good news is that there are ways to reduce or eliminate this retention requirement. The first exception has to do with the value of the property and the buyer's intentions. If the property sells for less than $300,000 - and the buyer intends to use the property at least 50% of the time over the next two years, the lien can be completely waived. The second exception applies if you receive a certificate of withholding from the IRS. In general, your tax liability will be significantly less than the amount of the lien because taxes are calculated on the difference between what you paid for your property (less certain expenses) and how much you sold it for, whereas the withholding rules apply to the full price''sale. If you expect your U.S. tax liability to be less than 15% of the sale price, you can apply for a certificate of withholding. Provided you apply to the IRS early, your custodian may withhold 15% in escrow while you wait for the application to be processed. The IRS will usually process the application within about 90 days, after which the detained funds will be released to you, less any amounts payable to the IRS. This is usually much faster than waiting for a refund from the IRS. The application for a withholding certificate is done on Form 8288-B and must be completed and sent to the IRS before the transaction closes.

5. The key factor is planning

If you decide to apply for''Getting a certificate of occupancy, you need to plan ahead - it takes time. In addition, you need to gather information about the property, convince the buyer to cooperate, and secure the services of a depository that will handle the process for you. If you don't take this step and funds are withheld at the time of sale, you will have to shell out 10% or 15% out of your pocket until you file your tax return and the IRS calculates your refund. It's important to note that while you are entitled to a refund, you may have to wait a while - while some Canadians have been able to get their money back in a few months, others have waited up to two years for their money. Selling your property in the US requires following a number of rules and''other purposes, there are other options that do not require you to pay capital gains tax or give up your US home. You can access your equity in the US by either refinancing your home or through a home equity line of credit. Both options allow you to have cash dollars in the U.S. without selling the property. Learn more about accessing your equity in the U.S..

1 Consult your financial, tax, legal, and other professional advisors for guidance on your specific situation.

Everything you need to know our attorneys This article is for general information only and should not be construed as providing legal, financial or other''professional advice. A professional advisor should be consulted regarding your specific situation. The information provided is believed to be reliable and up-to-date, but we do not guarantee its accuracy and it should not be considered a complete analysis of the issues discussed. All statements reflect the opinions of the authors at the time of publication and are subject to change. The Royal Bank of Canada or any of its affiliates does not explicitly or implicitly endorse any third party or their advice, opinions, information, products or services. Share article?