Tax implications of selling U.S. real estate
Canada taxes its residents on worldwide income. This means income in other countries is generally taxable in Canada. The U.S. taxes the sale of U.S. real estate by non-residents. So, Mary and Vic, a Canadian selling U.S. real estate can have tax implications in both countries.
What are the U.S. tax implications?
The U.S. government allows exemptions from capital gains tax for real estate in certain circumstances. Similar to the principal residence exemption in Canada, there is a principal residence exclusion in the U.S. It allows a capital gains tax exclusion of up to $250,000 of the capital gain on the sale of a qualifying home. For a couple, the exclusion is doubled to a total of $500,000.
U.S. taxpayers can also postpone paying capital gains tax if they sell a rental or business property and replace it with a similarly valued property. This is called a like-kind exchange.
The state of Montana even has a capital gains exclusion from the sale of a mobile home park. But, Mary and Vic, there are no capital gains exclusions for Canadian residents selling real estate in Arizona. Your USD$47,000 capital gain would be taxable to you in the U.S. in the year of sale.
The U.S. distinguishes between short- and long-term capital gains, and it charges different tax rates for each. As long as you have owned the property for more than a year, you will qualify for the lower long-term rate, with a maximum of 20% tax payable.
When you sell the property, a U.S. attorney will be required to withhold and remit 15% of the proceeds as withholding tax to the Internal Revenue Service (IRS). You may qualify for a withholding tax rate of 0%, if the sale price is under $300,000, or at a rate of 10%, if the price is between $300,000 and $1 million. That is assuming the buyer intends to occupy the home as a residence more than 50% of the time over the next two years. You may also be able to apply to the IRS to reduce the withholding tax if the tax payable would be significantly less than 15% of the proceeds.
Regardless, you will have to file a U.S. tax return to report the sale. You may be entitled to a refund or have some additional tax to pay. You will need to apply for a U.S. Individual Taxpayer Identification Number (ITIN) if you do not have one already. It is like a Social Security Number (SSN) for a non-resident (similar to a Canadian Social Insurance Number (SIN) that identifies you for tax purposes).
The U.S. tax withheld is eligible to be claimed on your Canadian tax return as a foreign tax credit. This helps avoid double taxation.
Jason Heath
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