Tax Considerations for Canadians Selling Their U.S. Properties

Owning a U.S. property and travelling south to enjoy the sunshine in states such as Florida or Arizona during the cold Canadian winters is enjoyed by many Canadians. However, as the Canadian dollar continues to weaken against the U.S. dollar during these uncertain economic times, the cost of ownership has become increasingly more expensive.

With rising costs of insurance, property taxes, condo fees, and time spent in the U.S., many Canadians are feeling the pinch and considering whether now is a good time to sell. If you are in this position, it is important to understand the Canadian and U.S. tax implications before making a decision.

What are the U.S. tax implications?

U.S. Tax Residency Rules: If you primarily reside in Canada and only visit your U.S. property for part of the year, you are likely not considered a U.S. tax resident. This article assumes that you are not a U.S. citizen, green card holder, nor someone who meets the U.S. Substantial Presence Test (SPT).

U.S. Non-resident Tax Filing Requirements: Even if you have never filed a U.S. income tax return before, the sale of a U.S. property is considered a taxable event which requires you to report the sale to the IRS. As the U.S. has the first right to tax the sale of a U.S. property, a non-resident U.S. income tax return (Form 1040NR) must be filed to report the sale to the IRS. In addition, depending on the location of the U.S. property, you may also need to file state and city tax returns.

How Much U.S. Income Tax Will I Owe?

FIRPTA Withholding Tax: Under the Foreign Investment in Real Property Act (FIRPTA), the IRS applies a 15% withholding tax on the gross sale price when a Canadian resident sells a U.S. property. This ensures that the seller meets their U.S. tax filing obligations with the IRS.

However, this withholding tax can be reduced or eliminated in the following instances:

• If the property is sold for less than USD $300,000 and the buyer will use it as a principal residence, no tax withholding is required.
• If the sale price is between USD $300,000 and $1 million, the withholding rate is reduced from 15% to 10%.
• You can file a request with the IRS to reduce the amount of tax withheld from 15% of the gross proceeds to the actual U.S. tax payable on the capital gain reported. However, this process involves additional paperwork. Generally, timing and filing costs make this option not worthwhile.

It is important to note that the tax withheld under FIRPTA is not the final tax bill. The income tax liability on the property sale will be calculated on the U.S. tax returns (as appropriate – federal, state, and city) which is often less than the tax withheld. Any excess tax withheld will be refunded once the appropriate U.S. tax returns are filed.

U.S. Capital Gains Tax Rates: If you owned the property for more than one year, capital gains tax applies at a maximum federal rate of 20%. If you owned it for less than one year, the gain is taxed as ordinary income, with a top federal marginal tax rate of 37%.

In addition, depending on where your property is located, the sale may be subject to state and city taxation on the capital gain. Note that certain states, such as Florida, are not subject to state income tax.

Will I Owe Canadian Income Taxes?

Foreign Tax Credit: As a Canadian tax resident, you must report worldwide income and gains, which means that the sale of a U.S. property is also reportable in Canada and subject to Canadian income tax. However, the Canada-U.S. tax treaty helps prevent double taxation. You can typically claim a foreign tax credit on your Canadian tax return for any U.S. taxes paid relating to the sale. If your Canadian tax rate is higher than the U.S. tax paid, you may owe additional tax in Canada.

Foreign Exchange Gain: It is important to note that even if your U.S. capital gain is not significant for tax purposes, you may still be subject to a Canadian tax liability due to the increase in the value of the U.S. dollar relative to the Canadian dollar. For Canadian tax purposes, your capital gain is calculated based on the sales proceeds less tax cost in U.S. dollars converted to Canadian dollars on the respective dates. For example, if you purchased a property in 2010 when the Canadian dollar was at par with the U.S. and sold it in January 2025 when the average exchange rate was 1.43, your capital gain reported for Canadian tax purposes will be greater due to foreign exchange gains.

What If I Rent Out My U.S. Property Instead?

U.S. Rental Income Tax Reporting: If you are not ready to sell, renting out your U.S. property to earn income and offset some of the ownership costs may be a potential alternative. Keep in mind net rental income must be reported to the IRS annually. The IRS requires a 30% withholding tax on gross rental income. However, an election can be made to avoid the withholding tax and instead pay the U.S. tax upon filing the U.S. non-resident tax return (Form 1040NR).

Note that if the property is used for personal purposes for more than 14 days in a year (or 10% of total days rented to others), then the deduction of certain rental expenses for U.S. tax purposes may be limited.

Canadian Income Tax Reporting: Net rental income must also be reported for Canadian tax purposes. You can claim a foreign tax credit for any U.S. income tax liability to avoid double taxation.

Other Important Considerations

ITIN Number: To file a U.S. tax return and FIRPTA withholding certificates (Form 8288 and 8288-A), non-resident sellers must obtain a U.S. Individual Tax Identification Number (ITIN).

U.S. Estate and Gift Tax Implications: If you pass away while owning a U.S. property, or gift the property to your children, it may be subject to U.S. estate or gift tax filing requirements, which the CRA does not have. As these rules can be complex, you should consult with a cross-border tax advisor and estate lawyer to understand potential tax implications.

Key Takeaways and Next Steps:

Selling a U.S. property as a Canadian resident comes with both U.S. and Canadian tax obligations to consider. Planning ahead and consulting a cross-border tax advisor as early as possible in the process can help minimize tax liabilities. If you have questions about the sale of your U.S. property and how it may impact your overall financial standing, speak to your Raymond James financial advisor.

This has been prepared by the Total Wealth Solutions Group of Raymond James Ltd. (RJL). Statistics and factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities nor is it meant to replace legal, accounting, taxation or other professional advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The information is furnished on the basis and understanding that RJL is to be under no liability whatsoever in respect thereof. This is intended for distribution only in those jurisdictions where RJL and the author are registered. Securities-related products and services are offered through Raymond James Ltd., Member - Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd. (“RJFP”), a subsidiary of Raymond James Ltd., which is not a Member - Canadian Investor Protection Fund. When providing life insurance products, Financial Advisors are acting as Insurance Representatives of RJFP. Raymond James Ltd.’s trust services are offered by Solus Trust Company (“STC”). STC is an affiliate of Raymond James Ltd. and provides trust services across Canada. STC is not a Member of the Canadian Investor Protection Fund. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.