Essential Planning Considerations for Canadians Selling U.S. property

by | Jun 13, 2019 | Estate Planning, Tax Filing Requirements, Tax Planning

Over the years it has become increasingly popular for Canadians to own real estate in U.S., especially in Florida. The warm climate of the Sunshine State provided an attractive escape to the harsh Canadian winters for the snowbirds. But with the rise in the U.S dollar and recent political turmoil, some Canadians are looking to sell. If you’re one of them you should continue reading before calling your real estate agent. Turns out there are a lot of things to take into consideration when you are a Canadian resident, we’ll cover some of the basics in this article.

For starters, you should be aware of the Foreign Investment in Real Property Tax Act of 1980 or FIRPTA for short. This law requires that the transferee (buyer) be held responsible to withhold 15% of the total amount of the disposition of a U.S. property when dealing with a foreign investor. The total amount of disposition in this scenario would normally be the purchase price. This withholding tax is held with the IRS until the foreign seller files their income taxes, at which point they may receive a refund depending on the situation.

Luckily, there are a few exceptions to this rule. For one, you may want to pay attention to who is buying your property. Ideally, your buyer should be a U.S citizen who will use the property as their main residence at least 50% of the time or a Cross Border Trust.

However, that alone is not enough to bypass the law and alleviate the burden of the 15% withholding tax! If your property is sold for over 300,000$ (U.S) despite meeting the first condition you will still be subject to FIRPTA.

Now that we got that covered let’s move on to the next important subject, capital gains. You may be questioning how you will be taxed on the gain realized on the disposition of your U.S. property. Here is how it works, you need to declare your gain on both sides of the border. However, unlike Canada where you are taxed on 50% of the capital gain, you will only be taxed on 20% on your capital gain with the IRS. The amount you pay to the IRS will generate a foreign tax credit with CRA which reduce the tax liability in Canada.  

However, if you elect your Florida residence as your principal residence for tax purposes you will not be required to pay taxes in Canada on your capital gains, which translates in tax savings of up to 15,000$ on a gain of 300,000$* excluding the foreign exchange. Remember that only one property can be designated as your primary residence! You should consult with a professional cross border planner to decide which property should be designated as your main residence for maximum tax efficiency.

To wrap things up, there are many implications to disposing of your U.S property. You should always seek the advice of a team of professionals who can help you navigate these complex transactions. 

MCA Cross Border Advisors Inc. has extensive experience and expertise in transitioning accounts and portfolios between Canada and the US.  With expertise in portfolio construction, manager search and selection, tax strategy, and financial planning, our team of experts can help create and structure a Canada/US cross-border optimized portfolio that remains aligned with your investment objectives and risk tolerance.

Irina Matco

Irina Matco

Cross Border Financial Planner

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MCA Cross Border Advisors, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.>