La Quinta, CA
(760) 895-3516

Thursday, April 30, 2015

8828-a Withholding Tax Recovery for Canadians

Canadians are taxed for sales of real estate in the U.S. by the IRS. Many snowbirds are buying up cheap homes in Florida, Arizona, and California (especially Coachella Valley) at a bargain of a price due to low prices and the high Canadian dollar. Here's what you need to know about selling a property in the U.S.:

1. Figure out your filing status for U.S. Income Tax

2. If non-resident, you will have 10% GROSS withholding tax at closing UNLESS..

3. Buyer to submit form 8828, 8828-a & W-7's to IRS during escrow, IRS sends you stamped copy.

4. File 1040NR in applicable tax year. Attach 8828-a (copy b)


1. Filing Status:

If substantial presence test met, you must file a 1040 and declare all worldwide income including your rental income UNLESS you file a form 8840 determining that you are not a U.S. resident. If you are a "non-resident" for U.S. tax purposes, you have 2 options:

2. 10% Withholding Tax

As a non-resident, a 10% withholding tax will be imposed. What happens is that the escrow company will hold on to 10% of the gross sale price of the property. Funds will be held until you file a tax return that will determine how much, if any you will get back. Can't wait 18 months to get the withholding tax back? You will need to to this BEFORE you close the sale of your property:

 File form 8828-b, which is an application for a withholding certificate. This takes an estimated 90 days to go through. We will need to calculate the tax that will be owing from the gain/loss from the sale of your property, and you will need to submit the non-foreign affidavit your seller signed (assuming they were a resident) when you bought the house, proof that you withheld when you purchased OR, if you purchased it before 1985 you will need to simply show proof that you purchased it before 1985 instead of showing a nonforeign affidavit.

3. Forms 8828 & 8828-a Submitted by Buyer

Make sure you let all parties know that you are a non-resident and that the buyer will need to submit forms 8828 & 8828-a. Most escrow companies/law firms will be familiar with these forms. It will be next to impossible to get any of the withheld tax back through filing a 1040NR without these forms. The buyer will submit these forms to the IRS. The IRS will send you a stamped copy (copy B).
****VERY IMPORTANT: If there is more than one person on title, the buyer's agent must make sure that each person on title receives their own form 8828-a under their own ITIN. If a person on title does not have an ITIN, a W-7 needs to be sent with the 8828 & 8828-a. Make sure your buyer's agent knows this because it will make half of the withheld tax very difficult to recover if only one person on title receives a form 8828-a (copy b).

4. File your 1040NR

All income made in the U.S. is taxable by the IRS for Canadians. You must file a 1040NR and pay taxes due. Recouping the tax paid through a 1040NR is for sellers who did not take advantage of form 8828-b or who were not able to sell under $300K to someone who would be a primary resident. At this point, everyone who is filing the 1040NR to get the withheld tax back should have ITIN's & form 8828-a (copy b) which is the stamped copy of the form received from the IRS. We will prepare the 1040NR stating the net gain/loss from the sale of your property and send it off with the 8828-a (copy b) attached.
We hope to work with you on the sale of your property in the U.S.
Borders Bookkeeping
(760) 895-3516