FIRPTA for Canadians Selling US Real Estate

Foreign Investment in Real Property Tax Act

The Foreign Investment in Real Property Tax Act or FIRPTA, applies to the disposition of U.S. real property by foreign owners. Canadians who sell a U.S. property may be subject to a 15% withholding of the purchase price by the IRS. There are ways to reduce or eliminate this withholding tax even if FIRPTA applies. If a seller can prove that his or her adjusted cost basis will reduce or eliminate his or her capital gain so that it amounts to less than 15% of the sale price, a special application can be made to the IRS asking for a reduction or exemption from FIRPTA. Our team has extensive experience working with Canadians and navigating their FIRPTA obligations.

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FIRPTA
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FIRPTA Tax Withholding

FIRPTA’S objective is to ensure non-resident aliens file U.S. income tax returns and pay taxes on profits generated in the U.S. FIRPTA was instituted to prevent foreign investors from selling U.S. real estate and neglecting to pay any outstanding U.S. tax obligations. FIRPTA prevents this by requiring Federal withholding of 10-15% of the full sale price, regardless of the seller’s profit from the transaction. The deposit is held by the IRS until the seller files income tax returns at the end of the year, at which time any taxes owed are deducted and the balance is refunded to the seller. If no tax is due, the entire amount held is refunded. The seller may also obtain an exemption certificate or waiver from the IRS, in which case the funds can be immediately released.

Sale Price

Less Than $300,000

0%

Sale Price

$300,000 to $1,000,000

10%

Sale Price

Over $1,000,000

15%

~ The withholding amount is determined by a number of factors, download our flowchart. ~

FIRPTA Guide

How Much Tax Will You Pay?

As a foreign non-resident of the United States, you are required to pay U.S. Capital Gains tax upon selling your U.S. property, if you have a gain in property value. The United States has long-term capital gains tax on profits from the sale of an asset held for more than one year. The long-term capital gains tax brackets listed below depend on your taxable income and filing status. Most Canadians do not have any other U.S. income so your tax bracket is determined by the profit you earn from the sale of the property. But you may have other income to claim such as rental, business, or employment income.

US Long-Term Capital Gains Tax Rates

Tax Rate Single Married – Filing Jointly Married – Filing Separately Head of Household
0% $0 to $40,400 $0 to $80,800 $0 to $40,400 $0 to $54,100
15% $40,401 to $445,850 $80,801 to $501,600 $40,401 to $250,800 $54,101 to $473,750
20% Over $445,850 Over $501,600 Over $250,800 Over $473,750

Arizona Income and Capital Gains Tax Rates

Tax Rate Single Married – Filing Jointly Married – Filing Separately Head of Household
2.59% $0 to $27,272 $0 to $54,544 $0 to $27,272 $0 to $54,544
3.34% $27,273 to $54,544 $54,545 to $109,088 $27,273 to $54,544 $54,545 to $109,088
4.17% $54,545 to $163,632 $109,089 to $327,263 $54,545 to $163,632 $109,089 to $327,263
4.50% Over $163,632 Over $327,263 Over $163,632 Over $327,263

***Federal and State tax rates stated by IRS and Arizona Department of Revenue for 2022***

The FIRPTA Process Step-by-Step

for Canadians Selling US Property

We help Canadians every step of the way through the selling process to ensure FIRPTA is managed correctly. We have a highly experienced team of professionals who have worked with FIRPTA for years. This includes cross border tax experts, title companies, and realtors. Having just one part of your sale managed incorrectly can cost you thousands of dollars!

Before you do anything, we highly recommend talking to a cross border tax expert who is familiar with FIRPTA. Most CPA’s are not experts and when paperwork is not filed correctly, you can be penalized costing you thousands of dollars. We have cross border CPA’s on our team who specialize in managing FIRPTA for our clients.
You will need an Individual Tax Identification Number (ITIN). This is a temporary number the IRS will use to track your tax withholding, income tax return, and potential refund. You will need a certified passport to apply for an ITIN, these are available in Canada at Passport Canada offices or through a certified agent in the United States. Only a few offices exist in Arizona, we work with CPA’s who have certified agents on staff to ensure this is processed correctly.
Once we have all your tax planning completed, we can list your property for sale and move forward with selling your home. We always want to make sure you know the numbers before we sell your property. The FIRPTA process can cause many issues if proper planning is not completed upfront. Most agents do not understand this process.
Upon closing, a title company will facilitate the sale of your property rather than a lawyer as is used in Canada. The title company has strict instructions to withhold the appropriate funds from your sale and submit these funds to the IRS within 20 days from your closing date. The title company will work hand in hand with your cross border accountant to ensure all paperwork is filed correctly.
In most cases, the tax withholding amount if higher than the actual taxes owed on the sale of your property. In this case you can apply for a withholding certificate. This certificate essentially reduces the withholding amount to the appropriate amount of taxes owed. It can take 6-8 months to receive a reduction in the withholding amount, but if you do not file this document, you will need to wait until the following year to file your US income tax return and receive a refund. Most Canadians are no longer filing this form due to the delays from the IRS. It may still be beneficial in some cases when sales occur in the early part of the year.
You are required to file a US tax return for the year in which you sell your US property. This can be done early in the year following the year of your sale. We recommend using the same cross border accountant who managed FIRPTA for your sale to ensure all documents match and you do not have a delay in your potential refund. If you do not file a return within 3 years of your sale, your refund will be forfeited to the IRS.

In most cases, the withholding amount will easily cover the taxes owed on the sale of your property so you could receive a refund. If the withholding was not sufficient, you may have a balance owing over and above the withholding amount. In today’s environment with Canadians experiencing huge gains on their US properties, some withholding’s are coming up short.

The Canada to Arizona Team

Our team is Canadian so we understand what Canadians need when selling property in the United States. We specialize in helping Canadians navigate every step of the home selling process to eliminate any possible tax or legal liability issues.

Miles Zimbaluk

Miles Zimbaluk

CEO Canada to Arizona & Canada to USA Inc
Arizona REALTOR® HomeSmart
Canadian Mortgage Broker

Call or Text: 480-324-6111
Toll Free: 1-844-226-8629
miles@canadatoarizona.com

Canada to Arizona Team

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