Canadians Eyeing U.S. Real Estate Sales in the Face of Rising Costs

Facing Higher Costs and Changing Policies
Rising insurance premiums throughout the U.S. Sunbelt, paired with policies from the Trump administration, are prompting some Canadians to consider selling their U.S. properties. Advisors note that the combination of escalating property values and a weaker Canadian dollar relative to the U.S. dollar is making this decision increasingly appealing.

“People are realizing, ‘I have significant gains on my property, and the currency exchange is advantageous, so maybe now’s the time to sell,’” remarks Darren Coleman, a senior portfolio manager at Portage Cross Border Wealth Management, affiliated with Raymond James Ltd. in Oakville, Ontario.

He explains that the escalating living costs, which include travel expenses and skyrocketing insurance premiums due to the hurricane and fire risks in the U.S. Sunbelt, are rendering property ownership south of the border more unaffordable.

“Several clients are expressing, ‘My expenses in U.S. dollars against my Canadian dollar income are becoming a burden. Owning this property is increasingly difficult,’” Mr. Coleman adds.

Additionally, some older baby boomers are opting not to pass their properties down to the next generation, choosing instead to sell.

Regardless of these motivations, Mr. Coleman stresses the importance of understanding the tax implications for Canadians who are non-U.S. persons before listing their U.S. real estate.

Navigating Cross-Border Capital Gains
Canadians selling property in the U.S. are required to report capital gains or losses in both Canada and the U.S. (Non-U.S. persons must file a U.S. non-resident Alien Income Tax Return.)

In the States, capital gains are categorized as either short-term or long-term, each with its own tax treatment, notes Nicole Ewing, a principal of the wealth planning office at TD Wealth in Ottawa.

She explains that short-term gains, applicable to property owned for less than a year, are taxed at up to 37% based on the individual’s marginal rate, while long-term gains are taxed at a flat rate of up to 20%, contingent on income.

The foreign tax credit may help prevent double taxation between the U.S. and Canada but applies only to non-business income taxes on foreign income. Additionally, distinct rules govern the use of a Canadian principal residence exemption for U.S. properties.

Currency fluctuations also play a crucial role when calculating gains from a U.S. property sale, Mr. Coleman points out.

For instance, a U.S. property bought for $500,000 and sold for $1 million shows a gain of $500,000 for IRS reporting but reflects a gain of approximately $695,000 in Canadian dollars for the Canada Revenue Agency (CRA).

“The CRA requires figures in Canadian dollars, so accurate conversions are essential,” advises Mr. Coleman.

Moreover, even if sold at the purchase price or a nominal loss, Canadians might present a capital gain in Canada if the local currency has depreciated against the U.S. dollar.

“When deciding, sellers must consider both currency valuations,” Mr. Coleman suggests.

Understanding U.S. Withholding Tax Protocols
For Canadians who are not U.S. residents, consideration of the Foreign Investment in Real Property Tax Act (FIRPTA) withholding tax is crucial, states Ms. Ewing.

The usual withholding rate is 15%, but specific exceptions apply depending on the property’s value and the buyer’s intended use. For instance, a property sold for under $300,000 could potentially see zero withholdings, whereas under $1 million might reduce withholdings to 10%. Sellers can request a withholding certificate from the IRS.

“The regulations are intricate, and given the potentially lengthy approval process for FIRPTA withholding certificates, some sellers might prefer having the tax withheld initially and later seeking a refund upon filing their U.S. tax return,” she explains. “Understanding the timeline, particularly if a sale occurs quickly, is important.”

Jean Richard, who serves as a senior manager and cross-border tax consultant at BMO Private Wealth in Sarasota, Florida, also emphasizes the necessity for Canadians who are non-U.S. residents to acquire a U.S. Individual Tax Identification Number (ITIN), a process that may take several weeks or even months.

An ITIN is required for anyone without a U.S. social security number, essential for reporting income on a U.S. tax return upon selling property in the country.

Mr. Richard advises that sellers complete Form W-7 and present genuine identification or certified documents like a passport, driver’s license, or birth certificate. Copies must be certified by the issuing authority.

“A prevalent issue is incorrect submissions. Neither an attorney nor a notary public can certify—only original issuers can,” Mr. Richard cautions, noting delays often arise from incomplete or inaccurate ITIN requests.

Seeking Expertise in Cross-Border Taxation
Beyond these core concerns, Canadians selling U.S. real estate must contemplate other aspects, such as rental history or holding the property within a corporation or trust. Consequently, most look to enlist tax and legal experts experienced in cross-border dealings.