La Quinta, CA
(760) 895-3516

Tuesday, April 21, 2015

10% Withholding Tax for Canadians Selling U.S. Real Estate

Many Canadians do not find out about the FIRPTA (Foreign Investment in Real Property Tax Act) 10% withholding tax until they are in the process of closing a sale on their U.S. real estate. Here's what you need to know about the 10% withholding tax as a Canadian selling U.S. property, taxation, the U.S. Canada Tax Treaty, and how it applies to you.. and how to get your money back of course!

1. The Buyer Is Required to Withhold 10% of the Gross Sale Price 

  • Usually done by the title company/attorney/escrow company depending on the State
  • The buyer is held responsible, though I have seen cases where the IRS will go after the seller if the 10% was not withheld
  • Make SURE your escrow company has dealt with FIRPTA before
  • Check if the escrow holds onto the withheld tax (20 days after sale) so you have more time to file 8288-b (see #2 below)
  • Buyer (escrow) files form 8288-a for each seller on title based on the IRS response from 8288-b (if filed).
    • IF YOU DON'T HAVE AN ITIN AT THIS POINT, LET ESCROW KNOW SO THEY CAN ATTACH A W-7 TO THE 8288-A
  • You will have to file a 1040NR to apply to get part or all of this money back 

2. You Can Apply for a Withholding Certificate to Reduce the 10%

  • You will file a 8288-B Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests
  • The IRS will reduce the withholding based on calculations of your maximum tax liability
  • They may ask for proof on amounts used in calculations
  • Applications are sent to Internal Revenue Service Center P.O. Box 409101 Ogden, UT 84409
  •  If you do not have an ITIN, you need will attach a W-7 to the application
  • You must apply within 20 days of the sale so long as your escrow/buyer has not filed 8288 yet
  • It is best to file this application before the close of the sale

It is always best to have a U.S. Canadian income tax preparer walk you through these things. Give us a call for any inquiries, we will help you navigate through the withholding taxes.

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