If you're one of the many Canadians who took advantage of the dramatic decline in U.S. property prices in the wake of the debt crisis a few years back, you’re likely now sitting on a sizable return on your investment. Property values have been rebounding south of the border, and with the gains the U.S. dollar has made against the Loonie since then, you could be well positioned to pocket an even bigger bonus.
But before you rush off to list your U.S. residence with a sales agent, there are some important things you must first consider.
For starters, you are required to file a U.S. tax return for the year the property is sold. In this return, you must declare and pay the capital gains tax on the profit generated from the sale. In addition, a 10 percent withholding tax may also apply if the property is sold for less than US $300,000, and the new owner intends to use it as a residence.
Reducing U.S. withholding tax amount
If you are subject to this withholding tax, you can apply to have the tax applied to the net capital gain, rather than the gross selling price, by filing form 8288-B with the IRS. This could result in a significant reduction in the amount you owe, but you must apply for this relief. Otherwise, you'll be expected to pay the withholding tax on the entire selling price.
If you intend to keep the property in your family, don’t think you can avoid taxes simply by “giving” the property to other family members. When transferring the ownership of the property – even as a gift – U.S. tax law includes specific rules regarding your tax obligations. These rules can get very complicated, so be sure to carefully research before proceeding. You can get started by reviewing this FAQ on gift taxes on the Internal Revenue Service website.
In addition to taxes owing to Uncle Sam, as a Canadian citizen you also have to satisfy the folks at the Canadian Revenue Agency. Again, the actual amount you owe will depend on any additional foreign income and other possible circumstances. But generally speaking, you'll have to pay capital gains tax on any profits earned from the sale of the property. The CRA website has considerable information on reporting foreign income, including a section specifically on foreign properties.
Taxes owed upon your death
If you die while owning property in the U.S., Canadian tax law treats this as a deemed disposition of the property, and your estate will be charged capital gains based on the current market value. Your estate will also be subject to U.S. tax laws, including one requirement that could see close to 40 percent of the property’s market value lost to taxes. Fortunately, few foreign property owners actually face this charge, as this additional tax is only applied if the total value of the estate exceeds U.S. $5.34 million.
Given the complexity of this topic and the many rules and exceptions that come into play, this short article can only provide a basic overview of what’s involved when selling property in the U.S. Please use this information as a starting point, and be sure you fully understand both your U.S. and Canadian tax obligations before selling your vacation property.