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What is FIRPTA?
FIRPTA (Foreign Investment in Real Property Tax Act) is a withholding tax on the sale of U.S. real property by a foreign person. With certain exceptions, the purchaser must withhold and remit tax of up to 15% of the gross selling price to the Internal Revenue Service (IRS) on behalf of the seller.
How to do I reduce FIRPTA withholding taxes?
If you estimate the actual amount of taxes owing will be less than this withholding tax, then you can apply for a withholding certificate from the IRS to reduce the number of withholdings.
In order to apply for the withholding certificate, you will need to file Form 8288-B with the IRS prior to the date of the sale and notify the buyer that you have applied for a FIRPTA certificate. If approved, the reduced withholding amount will equal the maximum tax that could apply on the net gain (i.e. purchase price less cost). You will need to include backup documents to support the original purchase price, cost of capital improvements and the selling price.
Note that filing Form 8288-B requires that an Individual Tax Identification Number (ITIN) be provided. If you don’t already have an ITIN, you can apply for one by filling out Form W-7 and sending it to the IRS along with Form 8288-B.
How do I recover amounts withheld under FIRPTA?
You will need to file a U.S. Income Tax Return – i.e. Form 1040NR – to report the sale of the real property and to pay tax on any gains on the sale of the property. Upon filing the Form 1040NR, any amounts withheld by the buyer will offset any taxes owing from the sale. In addition, you may also receive a foreign tax credit for the U.S. federal income taxes paid when filing your Canadian tax return.
At UHY Victor, we have expertise helping Canadians with U.S. FIRPTA withholdings when selling property in the US.
Contact us for a free consultation regarding your FIRPTA issues:
UHY Victor LLP Canada U.S. Tax Team