Canadians Selling U.S. Real Estate

As you may be aware of there is a federal tax withholding requirement on the sale of U.S. real estate by non-U.S. persons. This does not exempt the vendor from filing a U.S. tax return to report the sale and paying any tax payable or requesting a refund for excess federal tax withholding.

There are certain exemptions from the withholding such as if the purchase price is under $300K and the buyer is using the property as their home. For this exemption to be valid, the IRS regulations governing this provision must be followed with a certification from the purchaser to protect from penalties on the failure to withhold.

Without qualifying for any of the specific legislative FIRPTA withholding exemptions, the tax withholding can be reduced to what the estimate tax would be on the capital gain that is reported on the tax return, but only, by filing IRS form 8288-B application for a withholding certificate by the closing date of the sale with the FIRPTA office of the IRS.

The application requires copies of your sale agreement and your purchase agreement with a schedule supporting the adjusted basis and tax computation. If the property was rental, you need to update your financial information to the date of sale to properly compute the tax. Most renters have “passive activity loss” carry forwards that can be utilized in the computation of the tax payable.

If this is done and accepted you can have the withholding tax in your hands sooner than waiting for a refund upon filing the U.S. tax return next year. It usually takes 90 days for the IRS to respond to the 8288-B applicant.

Generally it makes sense not to file application for sales occurring late in the year as one could file the tax return as early as late January in most years and get the refund in due course. Presently it is taking up to 6 months for refunds from filing the non-resident tax returns because the NR returns must be paper-filed and the department appears to be over-loaded with these returns. Therefore, the 8288-B applications should be considered for all cases where there is significant withholding tax.

If you don’t have an ITIN as an individual vendor, you need to apply with the IRS Form W-7 by sending the ITIN application to the ITIN office with your 8288-B application. To speed things up at the FIRPTA office, it is advisable to also send copy of the 8288-B application to the FIRPTA office at the same time, indicating that you have sent in the ITIN application.