Canada to Arizona real estate info
I have heard about withholding taxes. What are they and will I have to pay them?
Canadian citizens selling a property in the US are subject to capital gains taxes on profits from the sale ( click the previous button below for more info on capital gains taxes). The Internal Revenue Service (IRS) wants to insure that those capital gains taxes are paid and does so through FIRPTA (the Foreign Investment in Real Property Tax Act of 1980). The FIRPTA tax is imposed on non-resident individuals and foreign corporations.
If a Canadian or any other foreign citizen sells a U.S. real property interest, a withholding tax of 10% of the gross sales price is due under FIRPTA. Keep in mind that this withholding tax is not in addition to capital gains, but is withheld to pay capital gains. The 10% withholding amount applies regardless of the adjusted basis in the property.
So, who withholds the tax? FIRPTA requires that the buyer in the property transfer is obligated to withhold 10% of the purchase price at closing and send it directly to the IRS instead of paying the full amount to the foreign seller. In Arizona, this is typically handled by the escrow company assisting with the transaction. The language in the act states that the tranferee must deduct and withhold 10% of the "amount realized" by the foreign seller. The "amount realized" is usually considered the purchase price at closing. The amount of gain is actually irrelevant.
For example, let's assume a property was originally purchase for $250,000 and is now being sold by a foreign owner for $350,000. For ease of this example, let's not figure in any costs of sale and say there is a $100,000 profit. Capital Gains rates vary but we will use 15% for this example. Therefore the capital gains tax due is $15,000. At the time of sale, the buyer is required to withhold 10% of the purchase price or $30,000. This will be paid to the IRS, who will then refund to the seller the difference between the withholding and actual tax due.
As stated above the tax withheld in not the amount actually due. The seller must file a U.S. income tax return for the year of the sale by the filing deadline. The return will show the amount of gain from the sale of the property and the amount of U.S. income tax due. The amount withheld is credited against any tax due.
There are exceptions to the requirement to withhold under FIRPTA. Many Canadian citizens purchasing vacation and investment properties will be able to take advantage of these exceptions.
1. The sales price is less than $300,000 US.
If the sales price is under $US $300,000 AND the buyer intends to use the property as a principal residence, FIRPTA withholding won't apply. The buyer doesn't have to be a US citizen, but must reside in the property for at least 50% of the time that the property is in use during each of the two years after the sale. Keep in mind that this means the withholding doesn't apply, but the seller will still be responsible to pay the capital gains tax (if applicable) and must fule a U.S. tax return. Under this exception a Canadian citizen selling a US real property interest in Arizona for under $300,000 will receive the full purchase price without any withholding taxes.
2. A Withholding Certificate
A withholding certificate can be obtained if the U.S. tax liability will be less than 10% of the sales price. This certificate may allow for reduced or eliminated withholding from the IRS and will indicate the appropriate amount to be withheld.
For more information check out the IRS information concerning FIRPTA at
http://www.irs.gov/businesses/small/international/article/0,,id=105000,00.html
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