Selling a vacation property in the U.S. requires planning

If you are considering listing your winter vacation home you need to plan well ahead with your tax specialist in Canada and a good U.S. lawyer, who is aware of the tax consequences of such a sale by non-U.S. citizens. | Flickr.com/Reza Etemad photo

Many retired and active farmers, along with other Canadians, escape to the southern states in winter to their homes away from home.

However, at a certain point, the property might have to be sold for a variety of reasons, including an estate sale or health reasons.

This year, there are a few other conditions leading to a jump in Canadians listing their southern properties.

One reason could be if you bought the place when the Canadian dollar was at par with the American dollar, before 2010. If you did, you’ve made a nice return now that United States currency has jumped significantly ahead of ours.

Another reason might be the closure of the Canadian-U.S. border due to COVID-19 making it more difficult and expensive to get your automobile, family and pets into the U.S. Then there is the rapid increase in pandemic cases south of the border and loss of health insurance to cover the cost of infection.

So, if you are considering listing your winter vacation home you need to plan well ahead with your tax specialist in Canada and a good U.S. lawyer, who is aware of the tax consequences of such a sale by non-U.S. citizens.

The most consequential fallout of a sale is something called FIRPTA, or the Foreign Investment in Real Property Tax Act, applied by a division of the Internal Revenue Service.

Because the IRS would otherwise have a harder time collecting tax from nonresidents, it imposes a withholding tax on the vendor, who must remit 15 percent of the gross amount of the purchase to the IRS.

The Canadian vendor is required to file a U.S. income tax return to report the gain on the sale and pay any tax, less the withholdings.

You can eventually get most of the amount withheld back once the actual capital gains tax has been established and paid but that can take between two to six months and in some cases it has taken up to two years.

There are ways around this if the sale price is less than US$300,000 and the purchaser agrees to minimal property occupation over a defined period of time. In this case, the withholding tax may be waived.

Another option is to lessen the amount withheld from the entire amount of the sale to the actual capital gain from the original purchase price less improvement costs. To do so, however, you must file the appropriate documents with the IRS, including an individual Tax Payer Identification Number (ITIN), before the deal closes.

You also have to report the sale to CRA as a capital gain but under the Canada-U.S. Tax Treaty you can claim taxes paid to the IRS as a foreign tax credit against your Canadian and provincial taxes. However, you must disclose the capital gain in Canadian dollars, which brings the exchange rate improvements into taxable play.

Please note that some states might also impose a tax on the sale.

Obviously, advance planning on your sale with the appropriate professionals can be critical.

Grant Diamond is a tax analyst in Saskatoon, SK., with FBC, a company that specializes in farm tax. Contact: fbc@fbc.ca or 800-265-1002.

About the author

explore

Stories from our other publications