Buyers and Sellers Beware: Tax Rules for the Sale of U.S. Real Property

January 2, 2019

Are you a resident of Canada thinking about selling your U.S. real property?

Whether you hold the property for investment, rent it out, or use it as an escape from Canadian winters, you should be aware of the rules outlined in the Foreign Investment in Real Property Tax Act (FIRPTA).

Sellers

If you are a nonresident alien (i.e. not a U.S. citizen, green card holder, or U.S. resident) selling property in the U.S., FIRPTA requires the buyer to withhold 15% of the sale proceeds.

If you expect the 15% withholding to be greater than your maximum U.S. tax liability (for example, if you sell the property for a loss or are eligible to claim a principal residence exemption), you may apply to the IRS for reduced withholding pursuant to a withholding certificate.

FIRPTA withholding is not your final U.S. tax liability, it is a credit against the actual tax on the sale of the property.  The actual tax due is calculated on a U.S. nonresident income tax return (Form 1040NR) which is typically filed by June 15 of the year following the year of the property sale.   You may get a refund or you may have a payment due if your actual U.S. tax liability is more than the FIRPTA withholding.

If you do not have a U.S tax ID number, you will need to apply for an Individual Taxpayer Identification Number (ITIN) when you file your U.S. tax return.

Buyers

If you are buying U.S. real property from a nonresident alien, you are responsible for withholding and remitting 15% of the purchase price to the IRS, regardless of whether or not you are a U.S. person.

Exceptions from withholding apply and include, for example, where the purchase price is not more than US$ 300,000 and the buyer has definite plans to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer.

If you fail to withhold and remit the required withholding, you are personally liable for the full amount of the FIRPTA withholding tax required, plus penalties and interest.

Individual states may have their own withholding requirements on the disposition of real property located in a particular state.  For example, California imposes a 3.33% withholding obligation and Hawaii imposes a 5% withholding obligation when real property located in the state is acquired by a nonresident.

If you are thinking about selling or buying real property located in the U.S., please contact your DMCL advisor.