Tax Implications of Selling US Real Estate as a US Citizen in Canada

If you’re a US citizen who has relocated to Canada and still maintain US real estate, there are a lot of interweaving tax considerations on both sides of the border that you must contend with when you plan to eventually sell the property. In today’s blog, we are going to address these thorny cross-border tax implications for a reader who had the following question:

“I’m a US citizen who moved to Canada on April 1^st of last year. I’m now interested in selling my property in Washington, but I’m concerned about the tax implications and filing requirements. Any advice would be greatly appreciated!”

We’ll start with an overview of the US tax implications, Canadian tax implications, and finally the cross border tax and reporting requirements.

First, the sale of the property will lead to US federal income tax (Washington does not levy state income taxes). The capital gain realized on the sale of the property will be added to your 2024 US individual income tax return (Form 1040) and taxed at long-term capital gains rates (assuming you have held the property for longer than a year) which vary depending on your income for the year but range from 0% to 20%. There is an additional 3.80% Net Investment Income Tax (NIIT) that may apply depending on your circumstances.

Depending on your past usage of the home, you may be eligible to leverage the Section 121 exclusion on the US side which allows you to shelter up to $250,000 USD ($500,000 USD if filing jointly) of the capital gain from income tax. However, there are various tests that need to be met in order to make this election.

Non-US taxpayers need to be aware of the Foreign Investment in Real Property Tax Act (FIRPTA), by which the IRS collects withholding tax on sales of US real estate by Canadian sellers. However, as a US citizen, you are not subject to the FIRPTA rules and will simply remit your taxes owing to the IRS by April 15^th, 2025, when you report the sale on your 2024 US tax return.

From a Canadian tax perspective, you will also need to report the capital gain from the sale of the property on your Canadian Income Tax & Benefit Return (Form T1). However, you will have received a step-up in cost basis on all your US assets, including your real estate, when you established Canadian residency on April 1^st, 2023. The fair market value of the property at that time, as well as the currency exchange on that date, will impact the amount of capital gain you have to report. Furthermore, only 50% of capital gains are taxable in Canada.

Finally, you may have noticed you will pay tax to both the IRS and CRA on the same capital gain. Absent any mitigating measures, this would amount to double taxation; fortunately, you will be able to leverage foreign tax credits on your Canadian tax return to offset the US tax paid which should help to eliminate the double taxation. This is a sophisticated practice that should be undertaken by an accountant who is skillful in cross-border tax preparation. Further complicating the matter is that the NIIT mentioned above may not be eligible for a foreign tax credit, potentially creating an unrecoverable double tax.

We hope this summary provides you some clarity on the process of selling your US real estate as a Canadian resident as well as the considerations to contemplate. For those considering selling US real estate as Canadian residents, we encourage you to plan ahead with a qualified cross-border financial planner and accountant.