The Foreign Investment in Real Property Tax Act (FIRTPA) imposes a requirement on the buyer to withhold taxes when a real property interest is disposed of by a foreign seller. A Canadian seller of U.S. property is considered a foreign seller, hence, the taxes must be withheld and remitted to IRS by the buyer.
FIRTPA Withholding Rates & Exceptions
FIRTPA withholding is generally 15% of the sales price. There are certain exceptions to withholding requirements.
If the buyer of the property wants to use the same property for personal use for at least 50 percent of the time in the next two years:
No withholding – Sales price of the property is equal to or less than US$ 300,000.
10% – Sales price is between US$ 300,000 and 1,000,000.
If the seller is exempt from taxes
The disposition results in a non-recognition of sale.
The seller is allowed a reduced withholding rate due to submission and acceptance of form 8288-B., or a correctly completed statement.
Section 1445 requires the buyer/transferee to remit withholding taxes within 20 days of closing. The buyer uses form 8288-A to remit the withheld amounts. If the Canadian seller has ITIN, IRS will send stamped form 8288-A to the seller/transferor. If the ITIN is missing, a notice explaining the requirement of ITIN is sent to the seller.