Canadians are cashing out of their United States properties in increasing numbers according to CanadianForex, one of North America’s leading currency exchange groups.* The reasons for the sell-offs are rising U.S. real estate prices and a weakening Canadian dollar. CanadianForex isn’t calling this a trend and it may, in fact, be nothing more than a blip – but if you are a Canadian thinking about retaining or selling a U.S. property, there’s lots to consider.
Retaining your U.S. property
With a lower Canadian dollar, budgets should be revised to include the increased costs of ownership. Expenses for property tax, utilities, maintenance and condo fees will be more expensive if they are paid from a Canadian source of income.
Selling your U.S. property
- Most Canadians are considered to be Non-resident Aliens under U.S. tax law – meaning they are neither U.S. citizens nor residents. As a non-resident alien you generally only pay tax on your U.S. source income, such as rental income, but the U.S. also has specific legislation designed to ensure tax is collected when a non-resident alien sells U.S. real estate.
- The Foreign Investment In Real Property Tax Act (FIRPTA) – requires the purchaser of the property to withhold 10% of the gross sale proceeds, which may far exceed the tax owing on any gain realized on the property. The excess withholding tax can be recovered after the sale by filing a U.S. tax return (Form 1040NR – the “NR” standing for non-resident). Taking into account the automatic extension granted to non-resident filers, the return must be filed by June 15 of the year after the sale.
- To file a U.S. tax return you will need a U.S. Individual Tax Identification Number (ITIN). If you do not have an ITIN, you can obtain one from the IRS by mailing a completed Form W-7 to the IRS Austin service center or filing such form with an “Acceptance Agent” or U.S. consular office.
- If the property has been owned for more than one year, U.S. tax rates on capital gains will range between 5%-20%, depending on the size of the gain and your other U.S. source income. If you reported rental income in the past, you may also have ordinary income from the recapture of prior depreciation claims. The capital gain and any recaptured capital cost allowance (CCA) will also be reportable in Canada, but you can typically claim a tax credit for the taxes paid in the U.S. On your Canadian return, your cost base and proceeds will be reported in Canadian dollars, so you may also have a currency gain.
These are only a few of the possibly expensive complexities when you’re selling a U.S. property. That’s why it makes good sense to look to the advice of your legal, accounting, and other professional advisors before you put up that For Sale sign.
*Financial Post – May 18, 2015
This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.