Higher insurance premiums across the U.S. sunbelt combined with the Trump administration’s policies have some Canadians looking to sell U.S. real estate.nycshooter/iStockPhoto / Getty Images
The Trump administration’s tariff war and threats to make Canada the U.S.’s 51st state have some Canadians considering selling their U.S. property. Advisers say rising property values and a lower Canadian dollar compared with the U.S. greenback are making the decision to sell even more attractive.
“People are saying, ‘I have a pretty good gain on my property and the currency is working in my favour, so maybe now’s the time to sell,’” says Darren Coleman, senior portfolio manager with Portage Cross Border Wealth Management at Raymond James Ltd. in Oakville, Ont.
He says the rising cost of living, including travel expenses and higher insurance premiums in hurricane- and fire-prone areas across the U.S. sunbelt, have also made owning real estate south of the border more expensive.
“Some clients say, ‘I have U.S.-dollar expenses against my Canadian-dollar income. Owning this place is getting harder,’” Mr. Coleman says.
Furthermore, some older baby boomers aren’t planning to pass the property on to the next generation, deciding to unload the asset instead.
Regardless of the reason, Mr. Coleman says there are tax effects that Canadians who are non-U.S. persons need to keep in mind before listing their U.S. real estate.
Report capital gains in Canada and the U.S.
Canadians who sell real property in the U.S. have to report the capital gain or loss in both Canada and the U.S. (And Canadians who are non-U.S. persons will be required to file a U.S. non-resident Alien Income Tax Return.)
In the U.S., capital gains are classified as short term or long term, and will have different tax treatments on the U.S. income tax return, says Nicole Ewing, principal, wealth planning office at TD Wealth in Ottawa.
She says short-term gains for property owned for less than 12 months are taxed at the individual’s marginal tax rate of up to 37 per cent while long-term gains are subject to a flat tax rate up to 20 per cent, depending on income.
She notes the foreign tax credit can be used to avoid double taxation in the U.S. and Canada but only against other non-business income taxes payable on foreign income. There are also different rules for using a Canadian principal residence exemption against the U.S. property.
Canadians also need to factor in currency fluctuations when calculating a gain on the sale of a U.S. property, Mr. Coleman says.
For example, a property bought for US$500,000 in the U.S. and sold for US$1-million will have a gain of US$500,000. That will be reported as a US$500,000 gain to the Internal Revenue Service (IRS) in the U.S. but a gain of about $695,000 to the Canada Revenue Agency (CRA).
“The CRA wants everything in Canadian dollars, so you have to do your math correctly,” Mr. Coleman says.
It’s possible that a Canadian who sells a U.S. property for the same price they bought it, or even at a loss, will still have to report a capital gain in Canada if the Canadian dollar drops against the U.S. dollar.
“Sellers need to look at both currencies when making their decisions,” Mr. Coleman says.
Make sure you understand withholding tax rules
Canadians who are non-U.S. persons are generally subject to the Foreign Investment in Real Property Tax Act (FIRPTA) rules – a withholding tax on the sale of U.S. real property by a foreign person, Ms. Ewing says.
The withholding rate is typically 15 per cent, but Ms. Ewing says there are exceptions based on the value of the property and whether the buyer will use the home as their primary residence.
She says withholdings on a property with a sale price less than US$300,000 could be reduced to zero, while a sale price of less than US$1-million could be reduced to 10 per cent. Individuals can request a withholding certificate from the IRS.
“The rules are complex and, given how long the FIRPTA withholding certificate approval process can take, some sellers may prefer to simply have the tax withheld and seek a refund when they file their U.S. tax return,” she says. “People need to have reasonable expectations about how long the process could take, especially if they get a buyer quickly.”
Jean Richard, senior manager, international and cross-border tax consultant at BMO Private Wealth in Sarasota, Fla., says Canadians who are non-U.S. persons should also have a U.S. Individual Tax Identification Number (ITIN), which can take several weeks – or even months – to get.
An ITIN is a unique nine-digit number issued by the IRS for people who don’t have or aren’t eligible for a U.S. social security number. It’s needed when reporting income on a U.S. tax return, which is necessary when selling property in the U.S.
Sellers need to complete Form W-7 and be able to provide proof of identity and foreign status, Mr. Richard says. The required documentation – such as a passport, driver’s licence or birth certificate – must be original or, if it is a copy, must be certified by the issuer of the original document.
“This has been the most frequent issue people are facing. Your lawyer or notary can’t be the ones certifying – only the issuer of the original document is accepted,” adds Mr. Richard, who has seen ITIN requests bounce back because the information was incorrect or incomplete.
He says the wrong information could lead to rejection and delays in getting the ITIN.
Seeking U.S. tax experts
There are several other considerations for Canadians selling U.S. real estate, such as if they rented out the property or if the property is held in a corporation or a trust. It’s why most Canadians and their advisers look for tax and legal professionals with cross-border experience.