Last Updated on December 17, 2024 by Rashad Bolbol

If you’re a Canadian selling property in the United States, you may encounter a tax rule called FIRPTA withholding. This can be confusing, especially if you’re not familiar with US tax laws. In this blog, we’ll break down what FIRPTA is, how it affects you as a non-US resident, and how you can minimize the tax withholding when selling US real estate.

What is FIRPTA Withholding?

FIRPTA stands for the Foreign Investment in Real Property Tax Act. Under this US tax law, when a non-US resident (like a Canadian) sells property located in the United States, the IRS requires the buyer to withhold a portion of the sale price to ensure taxes are paid.

Think of FIRPTA withholding as a “down payment” toward any potential taxes you owe on the sale. The amount withheld is sent directly to the IRS on your behalf.

How Much is FIRPTA Withholding?

The standard withholding rate under FIRPTA is 15% of the property’s gross sale price. This means that if you sell your US real estate for $300,000, the buyer will withhold $45,000 and remit it to the IRS.

Important: The 15% is based on the total sale price, not the profit (capital gain).

Why is FIRPTA Withholding Required?

FIRPTA withholding exists to ensure that non-US residents pay taxes on gains from US real estate sales. Since Canadians are not automatically part of the US tax system, FIRPTA helps the IRS collect taxes before the seller leaves with their funds.

However, withholding does not necessarily equal the actual tax you owe. If your tax liability is less than the amount withheld, you can claim a refund by filing a US tax return.

Exceptions to FIRPTA Withholding

Not all US real estate sales require FIRPTA withholding. Here are some common exceptions:

1. Property Sold for $300,000 or Less
   • If the buyer intends to use the property as a residence (and signs a statement confirming this), the withholding rate can be reduced to 0%.
   • This rule applies only if the sale price is $300,000 or less.
2. Lower Actual Tax Liability
   • If the tax you owe on the sale is less than 15% of the sale price, you can apply for a Withholding Certificate from the IRS to reduce the withholding amount.
3. Exempt Sellers
   • If you are a US resident for tax purposes or meet specific exemptions, FIRPTA may not apply.

Tip: Work with a tax professional to determine whether you qualify for an exception or reduced withholding.

Steps for Canadians Selling US. Real Estate

If you’re a Canadian resident selling property in the US, here’s what you can expect:

1. Agreement to Sell
   • FIRPTA withholding is usually discussed as part of the sales agreement. The buyer is responsible for withholding and sending the amount to the IRS.
2. Withholding and Payment
   • At closing, the buyer withholds 15% of the sale price and submits it to the IRS using Form 8288 and 8288-A.
3. File a US Tax Return
   • After the sale, you’ll need to file a US tax return to report the transaction. If your actual tax liability is less than the withheld amount, you can request a refund.
4. Request a Withholding Certificate (Optional)
   • To reduce the withholding amount upfront, you can apply for a Withholding Certificate (Form 8288-B). This requires advance planning but can help you avoid over-withholding.

How to Minimize FIRPTA Withholding

Here are some ways you can reduce FIRPTA withholding or speed up the refund process:

1. Apply for a Withholding Certificate
   • If your actual gain (profit) is less than 15% of the sale price, filing Form 8288-B before the sale can reduce the withholding to the correct amount.
2. Plan Ahead
   • Work with a tax professional before listing your property to identify strategies to minimize your tax exposure.
3. File Your US Tax Return Promptly
   • Filing your tax return as soon as possible after the sale ensures you can claim a refund of any excess withholding.

Key Takeaways

• FIRPTA withholding is a US tax rule that requires buyers to withhold 15% of the sale price when a non-resident sells US real estate.
• Canadians can minimize FIRPTA withholding by applying for a Withholding Certificate or qualifying for certain exemptions.
• Filing a US tax return is necessary to report the sale and claim any refund if the withholding amount exceeds the actual tax owed.

Need Help with FIRPTA Withholding?

Navigating FIRPTA rules and US tax laws can be complex, but you don’t have to do it alone. At Expert Accountant Services, we specialize in helping Canadians manage the tax implications of selling US real estate.

Whether you need help reducing FIRPTA withholding or filing your US tax return, our cross-border tax experts are here to guide you.

Contact us today to make the process smooth and stress-free!