Snowbirds Beware: How Canadian Vacation Homeowners Can Face Unexpected U.S. Withholding Tax When Selling Their Property

Snowbirds might face unexpected US withholding taxes when selling their Florida home.

As a Canadian snowbird, owning a vacation home in sunny Florida is a dream come true. For many, it’s a retreat to escape harsh Canadian winters, a place to relax, and even an investment that appreciates over time. However, selling your Florida property can bring with it some unexpected tax complications—specifically, U.S. withholding tax.

When you sell a vacation home in the U.S., even if you’re not a U.S. resident, you may find yourself subject to U.S. tax law, which requires the buyer to withhold a percentage of the sale price as part of a federal tax obligation.

What Is U.S. Withholding Tax and Why Is It a Concern for Canadian Snowbirds?

The U.S. has a tax rule that requires a non-U.S. resident (such as a Canadian) selling real property in the U.S. to pay a withholding tax of up to 15% of the sale price under the Foreign Investment in Real Property Tax Act (FIRPTA). This tax applies whether or not the property has appreciated in value, and whether or not the seller owes any additional U.S. taxes.

The withholding tax can cause some significant issues for Canadian snowbirds. Firstly, it’s a hefty sum to part with, and it’s withheld at the time of sale—before you even have a chance to file your tax return and determine your actual tax liability

Here’s how it works:

• When you sell a property in the U.S., the buyer is legally required to withhold a percentage of the sale price to ensure that the U.S. government can collect any taxes owed on the sale of the property.

• The withholding rate for most foreign sellers is 15%, but in some cases, it could be 10% or 35% depending on the circumstances.

  
  

While the amount withheld is a prepayment of U.S. tax, many snowbirds may not realize that they don’t automatically owe this full amount. In fact, they may be able to reduce or eliminate the withholding tax entirely. However, this requires understanding the rules and navigating the complex U.S. tax system.

This is where an expert in cross-border tax matters can be invaluable. A skilled CPA can help mitigate the negative financial impact of U.S. withholding tax by doing the following:

1. Assessing the Tax Situation: A CPA will begin by carefully reviewing the details of the sale, including the purchase price, the sale price, and any improvements or other factors that could affect the taxable gain on the sale. They can then determine the appropriate amount of U.S. tax liability based on the current rules and your specific situation.

2. Applying for a Reduced Withholding Rate: In certain situations, it may be possible to reduce the withholding tax rate. For example, if the sale price is below $300,000 and the buyer intends to use the property as their primary residence, the withholding tax may be reduced to 0%. A CPA can help you understand these exceptions and file the necessary forms to qualify for a reduced withholding rate.

3. Claiming a Refund for Over-Withholding: If the buyer has already withheld more than what you actually owe, your CPA can help you file for a refund with the IRS. The process typically involves filing a U.S. tax return (Form 1040NR) and requesting a refund of the excess withholding. Since the refund process can take several months, it’s important to correctly fill out all the paperwork in the right sequence and attach the required proofs, which helps expedite the process.

4. Navigating the Canada-U.S. Tax Treaty: The tax treaty between Canada and the U.S. provides certain protections against double taxation, meaning that you may be able to offset the U.S. withholding tax with a Canadian tax credit.

   
   

   Takeaways

   Selling your vacation home in Florida as a Canadian snowbird can lead to an unexpected U.S. withholding tax, which may seem like an insurmountable cost. However, with the help of a knowledgeable CPA who understands U.S. tax law, you may be able to reduce your withholding tax burden or even claim a refund of excess taxes withheld.

   
   

   If you're planning to sell your Florida property, don’t let the potential tax implications catch you by surprise. Reach out and let us guide you through the process, reduce the tax burden, and maximize your financial outcome.