Canada to Arizona real estate info  

I have heard about withholding taxes.  What are they and will I have to pay them?

PLEASE NOTE:  Effective Feb. 16, 2016 changes to FIRPTA withholding were implemented that are different than what is explained in the above video.  For residential sellers, the amount of withholding may have changed.  The following explains: 

Recent federal tax legislation increases the FIRPTA general withholding rate from 10% to 15% effective for closings on or after February 16, 2016. Closing agents should adjust their procedures and forms to reflect this change. (please reference H. R. 2029, now known as Public Law 114-113. See Section 324 for text of changes).

The 10% rate will still apply for those transactions in which the property is to be used by the Transferee as a residence, provided the amount realized (generally the sales price) does not exceed $1,000,000, and the existing $300,000 “exemption” remains unaffected. So here are the new guidelines:

• If the amount realized  is $300,000 or less, AND the property will be used by the Transferee as a residence, as provided for in the current regulations, no amount need be withheld or remitted.

• If the amount realized exceeds $300,000 but does not exceed $1,000,000, AND the property will be used by the Transferee as a residence (there are no regulations that specifically address these changes but many are assuming you can follow the current regulations for the $300,000 exemption), then the withholding rate is 10% on the full amount realized.

• If the amount realized exceeds $1,000,000, then the withholding rate is 15% on the entire amount, regardless of use by the Transferee.

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%( or 15%) 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 $35,000, unless an ecception applies.  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 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 file 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/Individuals/International-Taxpayers/FIRPTA-Withholding

****DISCLAIMER****

The purpose of this web site is to provide general guidance and information only and DOES NOT constitute tax, legal or investment or other professional advice. It is recommended that for accounting, tax, investment, legal or other professional advise that you consult the appropriate qualified accountant, financial advisor, attorney or other profession advisor. Therefore, Adam Tarr PC and the author of this site can not accept any responsibility for loss which may arise from reliance on information contained in this web site. 

Please note that each individual's personal circumstances vary, and your professional advisor (tax,financial, legal, etc) will be able to provide specific advice based on your personal circumstances.