As the US economy strengthens, so does its housing market. Canadian owners of US real estate may continue to enjoy the appreciation of their investment in the US market and subsequently choose to sell their assets at a gain in order capitalize on this growth. While it is a sound investment decision to sell US property at a gain, it is important to consider the impact of capital gains tax in both Canada and the US prior to disposition.
The US capital gains tax rate varies depending on the ownership structure of the US asset. For instance, the Internal Revenue Service (IRS) taxes US real estate held in a Canadian corporation at approximately 34%. State tax may also be applicable. In Florida, for example, state tax is levied at a rate of approximately 5.5%, which amounts to a total capital gains tax rate of approximately 40%.
By holding US real estate in a cross border trust or in one’s personal name, however, Canadians may be able to reduce their total capital gains tax rate in the US to as little as 20% on their net gain. Tax Partners frequently assist clients to create an ownership structure that minimizes US capital gains tax while preserving foreign tax credits available in Canada under the Canada-US Tax Treaty.
Our team also guides clients navigating the US Foreign Investment in Real Property Tax Act (FIRPTA). If FIRPTA applies, a Canadian who sells US real property may be subject to a 10% withholding of the purchase price by the IRS. FIRPTA is not an additional tax. If the amount of withholding exceeds the amount of capital gains tax required by the IRS, the IRS will refund the difference.
However, there are ways to reduce or eliminate FIRPTA withholding. If a seller can prove, for example, that his or her adjusted cost basis will reduce or eliminate his or her capital gain so that it amounts to less than 10% of the sale price, a special application can be made to the IRS asking for a reduction or exemption from FIRPTA. Our team regularly assists clients who are subject to FIRPTA.
Capital gains tax in the US is complex. Tax Partners has extensive experience creating ownership structures that minimize capital gains tax so that clients’ profits can be maximized.