Hello all,
I’m a single Canadian resident and Canadian citizen with a small vacation home in Florida worth about $50K. I never rented the property and have no US income of any kind.
I’m giving strong consideration to selling the property and would like to confirm a few things. Based on my own research and the help of this forum, I believe this is what needs to happen.
1) Complete a US 1040NR to report the gain on schedule D (Which is about $20K)
2) Calculate the US tax owing using the Qualified Dividend and Capital Gain Tax Worksheet in conjunction with the 1040NR
3) Report the gain on my Canadian return, claiming a foreign tax credit for any tax paid to the US
4) Buyer may have to withhold 15% at source because of FIRPTA rules
5) Because the value of the property is less than $300K, if the buyer uses the home for his principal residence, I can avoid the 15% withholding
6) Apply for US ITIN using form W7 at tax time and submit 1040NR with W7 to the address on the W7 form
I have a few simple questions.
1) From what I can tell I will pay no tax on this income in the US because my income is below $37,650 and the gain on the property will be considered a long-term gain. Is this correct? Seems weird that I would pay no tax on this to the US.
2) If the buyer is in fact going to use the property as his principal residence, how do I prove this to the IRS to avoid the 15% withholding?
3) Do I have any state tax requirements?
4) If no tax is required and no FIRPTA is withheld do I still have to file a 1040NR return?
5) Anything I missed? Anything else I should be aware of?
Thanks!
Canadian Selling US Vacation Property
Moderator: Mark T Serbinski CA CPA
1. Sounds right
2. Signed letter from buyer, see Form 8288-b instructions.
3. no
4. Yes, IRS requires you to PROVE that you owe no tax, if your income is above ~$5,000.
5. For Cdn cap gains, remember that you costs have to be in C$ when they were incurred, and your proceeds are in C$ when they were realized. You do not merely convert the US$20K to C$ using current rates.
2. Signed letter from buyer, see Form 8288-b instructions.
3. no
4. Yes, IRS requires you to PROVE that you owe no tax, if your income is above ~$5,000.
5. For Cdn cap gains, remember that you costs have to be in C$ when they were incurred, and your proceeds are in C$ when they were realized. You do not merely convert the US$20K to C$ using current rates.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Thanks so much!
Do you know if form 8288 or 8288-A are also required by me or the buyer?
Any idea how long it generally takes the IRS to process form 8288-B? If it takes too long, will the buyer’s lawyer just take the 15% from the buyer and hold it in escrow for me until I receive the certificate?
Do you know if form 8288 or 8288-A are also required by me or the buyer?
Any idea how long it generally takes the IRS to process form 8288-B? If it takes too long, will the buyer’s lawyer just take the 15% from the buyer and hold it in escrow for me until I receive the certificate?
If no tax is required and no FIRPTA is withheld do I still have to file a 1040NR return?
While "Yes, IRS requires you to PROVE that you owe no tax, if your income is above ~$5,000" is a correct statement, FIRPTA return filing requirements work differently and of their own accord require a return. FYI, there is also a return-filing exemption in Notice 89-57 for FIRPTA sales that qualify for non-recognition.
Do you know if form 8288 or 8288-A are also required by me or the buyer?
Only if a party to the sale applies for (8288b) and subsequently receive a withholding certificate from the IRS that ENTIRELY excuses withholding, buyer isn't required to file Form 8288.
Any idea how long it generally takes the IRS to process form 8288-B?
The IRS will generally act on these requests within 90 days after receipt of a complete application. A transferor that applies for a withholding certificate must notify the transferee in writing that the certificate has been applied for on the day of or the day prior to the transfer.
If it takes too long, will the buyer’s lawyer just take the 15% [see 10% comment below] from the buyer and hold it in escrow for me until I receive the certificate?
If an application for a withholding certificate is submitted on Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests to the IRS before or on the date of a transfer and the application is still pending with the IRS on the date of transfer, the correct withholding tax must be withheld, but does not have to be reported and paid immediately. The amount withheld (or lesser amount as determined by the IRS) must be reported and paid within 20 days following the day on which a copy of the withholding certificate or notice of denial is mailed by the IRS.
Thus, the buyer can hold 10% of the sales price in trust (without remitting to IRS) and release to foreign seller the excess of that trust amount over the required withholding tax amount, if any, IRS states in its the withholding certificate or notice of denial.
FYI 10 vs 15% -Protecting American Taxpayers from Tax Hikes (PATH) Act (H.R. 2029, P.L. 114-113) §324(b) and the enacted Reg. § 1.1445-1(b) , the 10% withholding rate continues to apply for a disposition of property that is acquired by the transferee for his use as a residence with respect to which the amount realized is greater than $300,000 but does not exceed $1 million.
Get buyers to sign a residential use affidavit.
While "Yes, IRS requires you to PROVE that you owe no tax, if your income is above ~$5,000" is a correct statement, FIRPTA return filing requirements work differently and of their own accord require a return. FYI, there is also a return-filing exemption in Notice 89-57 for FIRPTA sales that qualify for non-recognition.
Do you know if form 8288 or 8288-A are also required by me or the buyer?
Only if a party to the sale applies for (8288b) and subsequently receive a withholding certificate from the IRS that ENTIRELY excuses withholding, buyer isn't required to file Form 8288.
Any idea how long it generally takes the IRS to process form 8288-B?
The IRS will generally act on these requests within 90 days after receipt of a complete application. A transferor that applies for a withholding certificate must notify the transferee in writing that the certificate has been applied for on the day of or the day prior to the transfer.
If it takes too long, will the buyer’s lawyer just take the 15% [see 10% comment below] from the buyer and hold it in escrow for me until I receive the certificate?
If an application for a withholding certificate is submitted on Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests to the IRS before or on the date of a transfer and the application is still pending with the IRS on the date of transfer, the correct withholding tax must be withheld, but does not have to be reported and paid immediately. The amount withheld (or lesser amount as determined by the IRS) must be reported and paid within 20 days following the day on which a copy of the withholding certificate or notice of denial is mailed by the IRS.
Thus, the buyer can hold 10% of the sales price in trust (without remitting to IRS) and release to foreign seller the excess of that trust amount over the required withholding tax amount, if any, IRS states in its the withholding certificate or notice of denial.
FYI 10 vs 15% -Protecting American Taxpayers from Tax Hikes (PATH) Act (H.R. 2029, P.L. 114-113) §324(b) and the enacted Reg. § 1.1445-1(b) , the 10% withholding rate continues to apply for a disposition of property that is acquired by the transferee for his use as a residence with respect to which the amount realized is greater than $300,000 but does not exceed $1 million.
Get buyers to sign a residential use affidavit.
Thank you very much for the detailed response ND. I think I get it now. There are basically two possible outcomes here.
Scenario 1) If the buyer meets the exception and agrees to sign the residential use affidavit, no withholding or submission of forms to the IRS of any kind is required on my end OR the buyer’s end correct? In other words, no 15% withholding, and no form 8288, 8288-A or 8288-B is required at all.
I’m guessing I would just apply for my ITIN when I submit my 1040NR at tax time and enclose a copy of the signed affidavit from the buyer with my return. Anything else required?
Scenario 2) Buyer refuses to sign the affidavit or plans to rent the property and won’t qualify for the exception.
In this case I should submit the 8288-B form to the IRS to have the withholding completely waived (because my tax will be zero). While waiting for a decision from the IRS on the 8288-B, if we don’t receive a response before the closing date, the buyer still must withhold the 15% and hold it in trust with their lawyer; but does NOT submit the 8288 and 8288-A forms, or the 15% to the IRS.
The pending 8288-B basically temporarily suspends the obligation to pay the 15% and submit the 8288 and 8288-A forms to the IRS until the 20th day following the IRS determination on the 8288-B form. When the 8288-B is eventually approved with ZERO withholding, the buyer’s obligation to submit form 8288, 8288-A and the withholding to the IRS then becomes waived and no further action is required on the buyer’s part. Do I have this right?
I read several articles where the buyer’s lawyer advises them NOT to sign the affidavit because they have nothing to gain from it. The buyer is taking on all the risk and getting nothing in return when he or she relies on this exception. By relying on the residency exception, the buyer is giving up their right to change their mind and rent the property for the majority of time during these two 12-month periods. Do you know if this is very common?
Scenario 1) If the buyer meets the exception and agrees to sign the residential use affidavit, no withholding or submission of forms to the IRS of any kind is required on my end OR the buyer’s end correct? In other words, no 15% withholding, and no form 8288, 8288-A or 8288-B is required at all.
I’m guessing I would just apply for my ITIN when I submit my 1040NR at tax time and enclose a copy of the signed affidavit from the buyer with my return. Anything else required?
Scenario 2) Buyer refuses to sign the affidavit or plans to rent the property and won’t qualify for the exception.
In this case I should submit the 8288-B form to the IRS to have the withholding completely waived (because my tax will be zero). While waiting for a decision from the IRS on the 8288-B, if we don’t receive a response before the closing date, the buyer still must withhold the 15% and hold it in trust with their lawyer; but does NOT submit the 8288 and 8288-A forms, or the 15% to the IRS.
The pending 8288-B basically temporarily suspends the obligation to pay the 15% and submit the 8288 and 8288-A forms to the IRS until the 20th day following the IRS determination on the 8288-B form. When the 8288-B is eventually approved with ZERO withholding, the buyer’s obligation to submit form 8288, 8288-A and the withholding to the IRS then becomes waived and no further action is required on the buyer’s part. Do I have this right?
I read several articles where the buyer’s lawyer advises them NOT to sign the affidavit because they have nothing to gain from it. The buyer is taking on all the risk and getting nothing in return when he or she relies on this exception. By relying on the residency exception, the buyer is giving up their right to change their mind and rent the property for the majority of time during these two 12-month periods. Do you know if this is very common?
Personally, I would not sign it. As the buyer, I really don't care who my money goes to. So, you, the seller would need to negotiate that with the buyer, as part of your sale price and conditions.
How much is it worth to you to get that 15% now rather than later? It gets dicey for those who don't have 15% equity in the home.
And it is the BUYER who withholds, not the seller.
How much is it worth to you to get that 15% now rather than later? It gets dicey for those who don't have 15% equity in the home.
And it is the BUYER who withholds, not the seller.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Yeah if it was me I don't think I would sign it either. In my case the house has long been paid for, so I guess it's not a big deal if the buyer withholds the 15%, I will get it all back in April anyway. Or I could just complete the 8288-B form, it doesn't seem too difficult. Anyone have any experience with form 8288-B?
I think I would complete 7, 8 and 9 as follows (the rest looks straight forward).
7) Select option b) the transferor’s maximum tax liability is less than the tax required to be withheld.
8) Does the transferor have any unsatisfied withholding liability under section 1445? No
9) Is this application for a withholding certificate made under section 1445(e)? No
For section 7 it asks for supporting documentation to show the amount of tax owing. Can I just submit a completed Qualified Dividend and Capital Gain Tax Worksheet showing zero tax, or is something else recommended?
It also mentions to list all other personal property being sold with the property and for each to be supported by an appraisal. I’m selling all the furniture and appliances with the house, anyone know if this is applicable to these items?
Thanks for the help everyone!
I think I would complete 7, 8 and 9 as follows (the rest looks straight forward).
7) Select option b) the transferor’s maximum tax liability is less than the tax required to be withheld.
8) Does the transferor have any unsatisfied withholding liability under section 1445? No
9) Is this application for a withholding certificate made under section 1445(e)? No
For section 7 it asks for supporting documentation to show the amount of tax owing. Can I just submit a completed Qualified Dividend and Capital Gain Tax Worksheet showing zero tax, or is something else recommended?
It also mentions to list all other personal property being sold with the property and for each to be supported by an appraisal. I’m selling all the furniture and appliances with the house, anyone know if this is applicable to these items?
Thanks for the help everyone!
timf: you've misunderstood my advice and have reached incorrect conclusions that should you follow your stated plan, you'll be incompliant. Note that there is a BIG difference between "non-recognition" and not owing tax and being exempt from withholding and being entirely exempt via 8288-b. each scenario needs to be dealt with in its own way.
Thanks ND. Not sure what you mean my non-recognition. I'm guessing my scenario #1 must be incorrect then? Is 8288-B still required in scenario #1 as well?
For scenario #2, seems to me as long as I submit form 8288-B I should be ok. IRS will exempt the withholding completely, buyer's lawyer would hold 15% in trust until I get approval from IRS to waive withholding. Once I get approval, buyer's lawyer would give me the 15% held in trust. I would of course still need to complete a 1040NR and apply for an ITIN at tax time and submit a copy of the form 8288-B withholding approval with my 1040NR; but would still owe ZERO tax upon filing.
For scenario #2, seems to me as long as I submit form 8288-B I should be ok. IRS will exempt the withholding completely, buyer's lawyer would hold 15% in trust until I get approval from IRS to waive withholding. Once I get approval, buyer's lawyer would give me the 15% held in trust. I would of course still need to complete a 1040NR and apply for an ITIN at tax time and submit a copy of the form 8288-B withholding approval with my 1040NR; but would still owe ZERO tax upon filing.
Hi Nelsona and ND,
I just sold the property with a closing date of September 30th and have a couple quick questions. The owner will be using the property as their principal residence and agreed to sign the affidavit so I can avoid the FIRPTA requirements.
I agreed to a 2 year interest only mortgage at 5% with the full payment of principal ($50K) paid at the end of the two years.
1) Do I have to report the $2,500 of interest income in each of the next two years on a 1040NR and is any non-resident withholding tax required on this interest income? I realize that this income will have to be reported in Canada for sure.
2) Seems to me that I should be able to take a capital gains reserve on my Canadian return in year one for $16K and pay tax on a gain of $4K, and a reserve of $4K in year two and pay tax on the remaining $16K. Can a reserve be claimed in the US as well? Even if it can, should I even bother, I won’t owe any tax to the IRS?
I just sold the property with a closing date of September 30th and have a couple quick questions. The owner will be using the property as their principal residence and agreed to sign the affidavit so I can avoid the FIRPTA requirements.
I agreed to a 2 year interest only mortgage at 5% with the full payment of principal ($50K) paid at the end of the two years.
1) Do I have to report the $2,500 of interest income in each of the next two years on a 1040NR and is any non-resident withholding tax required on this interest income? I realize that this income will have to be reported in Canada for sure.
2) Seems to me that I should be able to take a capital gains reserve on my Canadian return in year one for $16K and pay tax on a gain of $4K, and a reserve of $4K in year two and pay tax on the remaining $16K. Can a reserve be claimed in the US as well? Even if it can, should I even bother, I won’t owe any tax to the IRS?
I have an update for anyone else following this post. I confirmed a few things with the lawyer I hired in Florida to handle the paperwork for the sale. The lawyer has a lot of experience with these types of transactions because of all the snow birds in his area.
He confirmed that if the buyer signs the affidavit for the $300K exemption, no forms (8288, 8288-A or 8288-B) are required by the buyer OR seller at all. All I need to do is apply for an ITIN at tax time and report the sale on a 1040NR.
I also determined that I would not bother claiming a reserve on the US side, but could do so on the Canadian side if I wanted to. Because there is no tax to pay in the US and therefore no foreign tax credits to claim in Canada, I'm ok to do this. If there were foreign tax credits, claiming the reserve might not make sense. This is because the credits could not be carried forward to a future year in Canada and there would be a mismatch in timing for foreign tax credit purposes.
Does this make sense about the reserve Nelsona? Also, can you provide any input on question 1) of my previous post concerning the $2500 of interest I will receive from the interest only mortgage. Thanks.
He confirmed that if the buyer signs the affidavit for the $300K exemption, no forms (8288, 8288-A or 8288-B) are required by the buyer OR seller at all. All I need to do is apply for an ITIN at tax time and report the sale on a 1040NR.
I also determined that I would not bother claiming a reserve on the US side, but could do so on the Canadian side if I wanted to. Because there is no tax to pay in the US and therefore no foreign tax credits to claim in Canada, I'm ok to do this. If there were foreign tax credits, claiming the reserve might not make sense. This is because the credits could not be carried forward to a future year in Canada and there would be a mismatch in timing for foreign tax credit purposes.
Does this make sense about the reserve Nelsona? Also, can you provide any input on question 1) of my previous post concerning the $2500 of interest I will receive from the interest only mortgage. Thanks.