What Is FIRPTA?
The Foreign Investment in Real Property Tax Act (FIRPTA) is a US federal law that requires buyers to withhold a percentage of the gross sale price when purchasing US real estate from a foreign seller. The withheld funds are remitted directly to the IRS as a prepayment toward the seller's US capital gains tax liability. FIRPTA applies to all foreign persons, including Canadian citizens and residents who are not US tax residents.
FIRPTA withholding is not a separate tax — it is an advance payment mechanism. Your actual tax liability may be higher or lower than the amount withheld. If the withholding exceeds your actual tax, you can claim a refund by filing a US tax return.
FIRPTA Withholding Rates
| Sale Price | Buyer Intent | Withholding Rate |
|---|---|---|
| $300,000 or less | Buyer will use as residence | 0% (exempt) |
| $300,001 – $1,000,000 | Buyer will use as residence | 10% of sale price |
| Over $1,000,000 | Any | 15% of sale price |
| Any amount | Buyer will NOT use as residence | 15% of sale price |
Strategies to Reduce FIRPTA Withholding
1. Withholding Certificate (Form 8288-B)
You can apply to the IRS for a withholding certificate that reduces the withholding to your actual estimated tax liability. This must be filed before or at closing, and the IRS typically takes 90 days to process. If approved, it can significantly reduce the cash tied up at closing.
2. Installment Sale Treatment
If the sale is structured as an installment sale, withholding may be applied proportionally to each payment received rather than the full amount at closing.
3. Ownership Through a US Corporation
If the property is held in a US C-corporation, different FIRPTA rules may apply. However, this structure has significant tax implications and should only be considered with professional advice.
Canada-US Tax Treaty Benefits
The Canada-US Tax Treaty prevents double taxation on the same income. When you pay US capital gains tax on the sale of US property, you can claim a foreign tax credit on your Canadian tax return, effectively reducing your Canadian tax by the amount paid to the US. This means you generally pay the higher of the two countries' tax rates, not both.
Filing Requirements After a Sale
After selling US property, Canadians must file a US nonresident tax return (Form 1040-NR) to report the sale, claim any applicable deductions (such as selling costs, capital improvements, and depreciation recapture), and request a refund of any excess FIRPTA withholding. You must also report the sale on your Canadian tax return and claim the foreign tax credit. Working with a cross-border CPA who understands both tax systems is strongly recommended.
Frequently Asked Questions
What is FIRPTA and how does it affect Canadian sellers of US property?
FIRPTA requires that when a foreign person sells US real estate, the buyer must withhold a percentage of the gross sale price and remit it to the IRS. For Canadians, this means 15% withholding on sales over $1,000,000, 10% on sales between $300,001 and $1,000,000 when the buyer intends to use it as a residence, and potentially 0% on sales of $300,000 or less to a buyer who will use it as a residence. The withheld amount is a prepayment toward your actual tax liability — you can recover excess withholding by filing a US tax return.
Can Canadians reduce or avoid FIRPTA withholding?
Yes. Options include applying for a withholding certificate (Form 8288-B) to reduce withholding to your estimated tax liability, qualifying for the $300,000 exemption, selling through certain corporate structures, and filing a US tax return to claim a refund of excess withholding.
How do Canadians file for a FIRPTA refund?
File a US tax return (Form 1040-NR) reporting the sale and calculating your actual capital gains tax. If the FIRPTA withholding exceeds your actual tax, the IRS refunds the difference. Also report the gain on your Canadian return and claim a foreign tax credit under the Canada-US Tax Treaty.
Does FIRPTA apply to inherited US property sold by a Canadian?
Yes, but the tax basis is stepped up to fair market value at the date of death, which often significantly reduces or eliminates the capital gain. FIRPTA withholding still applies at closing, but you can file for a refund if the actual tax liability is less than the amount withheld.
Planning a US Property Sale?
David Nataf helps Canadian clients understand the financial implications of US real estate transactions, including FIRPTA planning for future sales.
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