FIRPTA and Capital Gains on the Sale of U.S. Real Estate

More and more Canadians are purchasing U.S. real estate for personal and/or rental use so this is a very important topic to understand before the purchase is made.

When a U.S. property is sold it triggers a taxable event no matter what your residency status is.

When U.S. real property is sold by anyone, a taxable event takes place which requires the person to calculate whether a capital gain or capital loss exists. If a capital gain exists, then income taxes may be due on that disposition. When a foreign persona sells U.S. real property, the disposition of that property is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. That is, anyone purchasing U.S. real property interests from foreign persons is required to withhold 10% of the purchase price; foreign persons can be individuals or corporations. The withholding tax is simply a prepayment of the income tax that may result on the disposition of the property, but is not in addition to regular income tax. The withholding tax is applicable even if a loss results from the disposition; however, you can request a reduced amount of withholding tax in a situation like that.

The FIRPTA withholding tax amount is 10% of the gross proceeds for an individual disposing of the property.

Generally, the buyer (the transferee) must deduct and withhold a tax equal to 10% of the total amount realized by the foreign person on the disposition (i.e. gross sales proceeds). The amount realized is generally the total amount paid for the property. In most cases, the buyer is the withholding agent. It is incumbent upon the buyer to find out if the seller is a foreign person. If the seller is a foreign person and the buyer fails to withhold, the buyer may be held liable for the tax.

If the seller (transferor) is a foreign person and the buyer fails to withhold, the buyer may be held personally liable for the tax. It doesn’t matter where the buyer is resident or what the buyer’s citizenship status is.

If you are a Canadian selling U.S. real estate, then not only will your total proceeds from the sale of the property be subject to the FIRPTA withholding tax, but you may also have to pay capital gains tax in the U.S. and/or Canada. The point is that you need to have your head up about U.S. real estate investments; know what you’re getting into and plan accordingly in order to minimize the cross-border tax hit.

To learn more about non-residents owning U.S. real estate, pick up a copy of Canadians & The IRS, by Angela Preteau – available in the Knowledge Bureau bookstore.

Excerpted from Canadians & The IRS. © Knowledge Bureau, Inc. All rights reserved.