Serving Brevard Realty
If a Canadian sells real estate located in the U.S. , a withholding tax of 10% of the gross sales price is normally payable under FIRPTA (the Foreign Investment in Real Property Tax Act of 1980). The tax withheld can be offset against the U.S. income tax payable on any gain realized on the sale, and refunded if it exceeds the tax liability. The 10% withholding requirement on the gross sales price applies regardless of the sellers adjusted basis in the property.
There are two exceptions to FIRPTAs 10% withholding requirement which may reduce or eliminate the requirement.
Exception 1: Sales price less than U.S. $300,000
First, withholding under FIRPTA will not apply if the property is sold for less than U.S. $300,000, and the purchaser intends to use it as a principal residence. The buyer need not be a U.S. resident. For this exception to apply, the purchaser must have definite plans to reside at the property for at least half of the time that the property is in use during each of the two years following the sale. However, the gain on the sale will still be taxable in the U.S., and a U.S. tax return must therefore be filed. Thus, if a Canadian is selling a Florida condo or any other U.S. real estate, for less than U.S. $300,000 to a buyer who intends to occupy it as a principal residence, the seller will receive the full purchase price rather than having 10% withheld by the buyer and remitted to the IRS.
Withholding certificate The second exception allows for reduced, or eliminated withholding, where the Canadian obtains a withholding certificate from the IRS on the basis that the expected U.S. tax liability will be less than 10% of the sales price. The certificate will indicate what amount of tax should be withheld by the purchaser rather than the full 10%. A withholding certificate issued after the transfer of the property may allow the seller to receive an early refund.
Under the Protocol, Canada now permits U.S. estate tax to be deducted from Canadian tax otherwise payable in certain circumstance. In some cases, this will not offer any relief since the credit will be limited to the Canadian tax attributable to U.S. source income including the gain on assets which are subject to U.S. estate tax. Since the U.S. estate tax is imposed on gross value while Canadian tax arising at death is imposed on capital gains arising from appreciation, there may be no credit in Canada if there is no appreciation in the assets.
Also, the foreign tax credit is generally only available if the incidence of U.S. estate tax and Canadian income tax occur during the same year. Difference between the Canadian and U.S. spousal rollover rules mean that steps must be taken to make sure such matching occurs. An estate should be careful to make the appropriate elections to ensure that U.S. estate and Canadian taxes come due in the same year for foreign tax credit purposes.
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