by Richard Nash CFP and Michael Danchuk CFP
Investors Group Financial Services
The taxing truth about selling your U.S. property. Escalating costs may have you considering the sale of your U.S. real estate holdings. But, before you hammer in that “For Sale” sign, consider this — as a Canadian resident, your sale has the potential to attract Canadian, U.S. and U.S. State income tax.
Canadian Taxation
As a resident of Canada, your worldwide income is taxable — which means that the taxable capital gain or loss on the sale of a U.S. property must be reported on your Canadian tax return in the year of sale. It is possible to use your principal residence exemption to shelter the gain from Canadian income tax, but you may not want to waste that exemption if tax arises in the U.S. on the transaction. If you have claimed depreciation on the property, there is also a possibility for recapturing that depreciation — which is fully taxable.
U.S. Taxation
The U.S. imposes tax on real property in accordance with the Foreign Investment In Real Property Tax Act (FIRPTA). Therefore, you must report the sale of U.S. real estate on a U.S. tax return, regardless of whether you gained or sustained a loss on the sale. And keep in mind, there are some differences on how the capital gain is taxed in the U.S.. In Canada, we tax the difference between the fair market value and the ‘adjusted cost base’ of a property. In the U.S., the capital gain is the difference between the fair market value and ‘basis’, which may not be the same as the ‘adjusted cost base’. If you have claimed depreciation on your U.S. property for tax purposes, the ‘basis’ will be reduced by all the depreciation previously claimed. As a result, the capital gain for U.S. purposes may be greater than the Canadian capital gain. There is no recapture of depreciation for U.S. purposes. Capital gains are fully taxable in the U.S., although the rate of tax applied to a gain may be lower.
U.S. State Taxation
Each state imposes its own taxes so you must consult the relevant legislation for the state in which your property is located. Any state income tax may be used as a deduction when calculating U.S. federal tax.
Canada-US Tax Treaty
To prevent double taxation, Canada allows you a foreign tax credit up to the amount of the U.S. tax paid. Property owned on September 26, 1980 is afforded special treatment that may reduce the amount of your U.S. taxation.
Witholding Tax on Sale
The U.S. may impose a withholding tax on the sale. Ten percent of the gross proceeds of the sale will be withheld, unless the purchase price is $300,000 U.S. or less and the purchaser intends to use the property as a residence. This tax is shown as a credit on your U.S. federal tax return.
These are just some of the subtleties impacting the sale of your U.S. property. Be sure to talk to us before you decide for sure if ‘For Sale’ is right for you.