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The red, white, and blues of selling U.S. property

You may have grown tired of your little slice of palm-treed heaven, but if you're a Canadian snowbird thinking of selling your vacation property in the United States, there are tax matters to consider.

"Not only do you have to deal with Canada Revenue Agency, you'll also be involved with the U.S. Internal Revenue Service (IRS) and possibly the tax collector in the state where the property is located," says Tannis Dawson, CA Senior Specialist, Tax & Estate Planning at Investors Group. "When you sell any U.S. home, condo, or even timeshares, you must report the transaction on a U.S. tax return, even if it is sold as a loss."

The pain of gain

The concept of a capital gain in the U.S. is not the same as it is in Canada. "The full amount of the capital gain is taxable in the U.S., and the way the gain is calculated is different too," advises Dawson.

You must also report the capital gain or loss on the sale on your tax return in Canada. While it may be possible to use your principal residence exemption to shelter the gain from Canadian income tax, you may be wasting that exemption if there will be tax on the transaction in the U.S. On the Canadian tax return, a foreign tax credit will be allowed to the extent of the U.S. tax paid.

Asking more or less

The sale price of your property has implications too. If the property sells for more than $300,000, the Internal Revenue Service (IRS) imposes a withholding tax of 10 per cent of the gross amount of the sale. This tax is in effect a prepayment of tax to be paid on filing the U.S. return. If the prices is $300,000 or less and the buyer plans to use the property as a residence, no tax will be taken off the closing.

"If you can demonstrate that the ultimate federal liability is less than the amount of the ten per cent withholding, you can apply for a certificate for reduced withholding," Dawson adds. "If you do so in advance of the sale, but have not received the certificate by closing, you can notify the escrow agent that the form has been filed. The agent will still hold back ten per cent but will release any excess once authorized by the IRS."

Selling your U.S. property may be taxing in many ways, so contact your Investors Group Consultant before your 'For Sale' sign goes up.

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This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.