Lorraine Ryall
The Foreign Investment in Real Property Tax Act of 1980, also known as FIRPTA, applies when a foreign person sells U.S. real estate.
FIRPTA defines a foreign seller as a non-resident alien individual, a foreign corporation not treated as a domestic corporation, or a foreign partnership, trust or estate.
East Mesa has been one of the top locations for Canadians to purchase their second homes, but with the stronger Canadian dollar over the past few years, more Canadians have been selling to take advantage of the exchange rate. Understanding the tax laws and how they will impact you as the seller or the buyer can save you time and money, as well as possible penalties. Whether you are a Canadian or another non-U.S. resident, these laws and taxes apply the same.
How Much Will I Have to Withhold?
As a Canadian citizen, when you sell a U.S. property, you may be subject to withholding tax of up to 15 percent of the gross proceeds on the sale. If the buyer is purchasing the property as his primary residence, and the sales price is less than $300,000, tax is not required to be withheld. If the buyer is purchasing the property as his primary residence, and the sales price is between $300,000 and $1 million, the tax withheld is 10 percent. If neither of these two scenarios applies, 15 percent tax must be withheld.
How Are Funds Withheld?
The title company handling the sale of the property will withhold the funds, as shown on the Settlement Statement at closing, and submit the funds to the IRS within 20 days of the close of escrow.
Why Is The Buyer Responsible for Tax Withholding?
Although the tax withholdings are deducted from the seller’s proceeds from the sale of the property, and held back by the title company, if for any reason it is not withheld, FIRPTA law holds the buyer liable for the amount that should have been withheld. With the seller living outside of the U.S., the IRS has made this tax the buyer’s responsibility, and they will pursue the buyer or place a lien on the property to collect their tax, if necessary.
How Long Can You Stay in the U.S. Without Being Considered a Resident?
A common misconception is that Canadians regularly travelling to the U.S. for long stays can spend up to 182 days, or six months, in the U.S. without being considered a resident for tax purposes. Although Canadians can stay in the U.S. for up to six months per immigration, it’s not that simple for the IRS and taxes. If you are travelling to the U.S. for long stays year after year, your stay is averaged using a special formula (see below) over a period of three years. The total number of days spent in the current travel year is added to one-third the total number of days spent in the previous year, and one-sixth the number of days spent in the year prior to that.
Formula
2014 – 115 days 1/6 = 19
2015 – 120 days 1/3 = 40
2016 – 123 days 1 = 123
Total = 182
If your stay is more than six months in three years using the formula above, you are now considered a U.S. person and subject to U.S. taxes on all your income and reporting that income to the U.S. There are exceptions to this rule if you do find yourself in the U.S. for longer than six months. Your tax accountant can advise you on this.
Can You Withhold Less than the 15 Percent?
The tax withholding is based on the gross sales price, but the seller can do a pre-audit for the net proceeds and submit to the IRS prior to the date of transfer. All receipts for depreciation, along with all allowed expenses, must be submitted. Title will withhold the funds without sending to the IRS until they get the determination. If it is approved, funds will be returned to the seller. If not, the funds will be transferred to the IRS.
Regardless, if you have withholding, you still have to file a U.S. tax return. If you do not file, the IRS can withhold 30 percent.
If you are selling a home toward the end of the year, you want to try and close by Dec. 31. Otherwise, you cannot file your tax return for another year.
CANADIAN TAX RULES
Even if you do not owe any U.S. tax, that doesn’t mean you will not have to pay Canadian tax.
Example
2012 purchase property for $300K USD
When exchange rate is .9 ($270,000 cdn)
2017 sell property for $300K USD
When exchange rate is 1.2 ($360,000 cdn)
U.S. No gain or loss
Canadian Capital Gain of $90,000 cdn ($360,000 – $270,000)
There are many more exceptions and scenarios other than those outlined here. This is just a summary and not intended as tax or legal advice. Consult your CPA or attorney, or if you would like a recommendation for an approved accountant for FIRPTA withholding, or information on selling your home with FIRPTA, please don’t hesitate to contact me directly.
Lorraine Ryall has been a Multi-Million Dollar producer for the past nine years. If you are thinking of buying or selling and would like more information or a market analysis, please contact her at Lorraine@Homes2SellAZ.com, or call (602) 571-6799. Visit her website at Homes2SellAZ.com.
