You’re not alone. Numerous investors bought property years ago in the Greater Phoenix Real Estate Area and then rented property out while awaiting the right time to cash out. And also there are those that have not been using their vacation home as much as they thought they would, concerned about health conditions/political climate or perhaps feeling financial worry due to the Canadian economy and/or currency exchange.
Many are wondering if this is a good time to cash out?
I have been contacted frequently to have conversation about this topic and subsequently have personally listed and sold dozens of homes owned by Canadians in the Greater Phoenix Real Estate area in the last year.
Gains are occurring due to primarily a couple of factors. One significant factor is that if you have owned your home down here for more than a year or two, you will likely have benefited from increased property value. Our market has experienced steady property value increases since the fall of 2011. The 2020- 2021 market conditions were characterized by high demand and record-low inventory… and so values rose dramatically. Secondly, just the differential between the Canadian dollar and the American dollar factor alone, you can stand to gain tens of thousands of dollars profit when bringing home American dollars for the sale of your home down here. As an example: if you bought a home between 2009 and 2013 for $150,000, it could be worth $350,000 or more right now. Now factor in taking home $350,000 USD to Canada and converting it over to $420000+ CAD. This is an example that represents a huge profit in a relatively short period of time that has been common place in the current Phoenix Real Estate market.
What about the tax implications?So naturally, a good deal of the conversations that I have with Canadians include questions about potential tax implications, how and when to file a tax return to report a capital gain and other relative queries. It is a good idea to consult with your own accountant about your own personal situation. Ideally they will have cross-border accountancy experience…if not, I can refer you to our accountant that does have this experience or to other qualified firms locally and close to you too. However, having said that, I know more than the basics and can answer many questions upfront that you will have.Here’s some of those basics to get us started:
–As a non-resident, you are required to report the sale of your property (and any potential capital gain) to the IRS by filing a tax return….just as you would have to report the sale of a second residence up there resulting in a capital gain to Canada Revenue Agency. In order to file a tax return, you will need to have an International Taxpayer Identification Number ( typically only investors already have this ITIN so they could report rental income to the IRS). You could apply for this ITIN on a W7 form at the same time as filing your tax return (a 1040NR). However it is recommended that you get the ITIN right after the sale has closed. You’ll need to get a certified copy of your Canadian Passport (you can get this from Service Canada) to send in with your W7. As an alternative, if you are in Arizona at the time your property is for sale or going to be sold, an accredited IRS Acceptance Agent can look at your passports and complete a form that he/she has verified them thus negating the need for you to get a certified copy from Service Canada. I refer my clients to an Acceptance Agent that as a CPA, he can also complete your tax filing too.
–If the sale of your home is under $300,000, there is an exemption in place for the 15% tax withholding that could occur at closing time. Providing that the buyer of your home (or a member of the buyer’s family) intends to use the home for their personal use for 50% of the number of days that it will be used for the following 2 twelve month periods, then it will be exempt from the withholding. You simply file a tax return following the end of the current taxation year and pay the tax on your capital gain when you file. So if you want to avoid having tax withheld, then we can specify on the MLS listing that owner occupancy is required and get the buyers to sign an affidavit to that effect. This relieves you of the tax withholding and postpone paying any resulting tax until you file.
–if you sell your home for over $300,000 but less than $1,000,000, 10% of the sale price will be withheld and forwarded to the IRS. If you sell your home for over $1,000,000, then 15% of the sale price will get withheld and remitted to the IRS.
– If you decide to sell your under $300,000 home to a buyer who intends to rent it out, then 15% of the sale proceeds will get deducted from your sale proceeds by the escrow officer and remitted to the IRS within 20 days of closing. You then file your tax return following the end of the tax year and if what you owe for capital gains tax is less than the 15% that was remitted, you will get a refund. You can still potentially avoid the 15% withholding….if the anticipated tax implication resulting from the net gain is less than that 15% withheld, you can apply for a withholding certificate (Form 8288-B) to lower the amount withheld. The IRS must reply within 90 days of 8288-B application so if the sale closes in the meanwhile, that 15% will be held in escrow until the IRS decides.
-qualifying improvements to your property during your ownership (many capital improvements like adding a pool or renovations will qualify but not including cosmetic items like paint) and also real estate commissions are allowable expenses to reduce your net capital gain. The tax rate on long-term capital gains are currently 15% ( 20% for high US income earners) so if your net gain after allowable expenses is $50000 you will owe $7500 to the IRS. A tax form also gets filed with the State of Arizona. Tax rate for 2022 is 2.98%…the tax rate for 2023 is 2.5%.
-you are required by Canada Revenue Agency ( CRA) to report all of your worldly income so that includes your capital gain from down here. Fortunately, there is a tax treaty in place between Canada and the United States. This was put in place so that you will not be double-taxed. To calculate your taxable capital gain in Canada, a currency exchange conversion will be required as the sale must be accounted for in Canadian dollars to the CRA. In Canada you pay tax on half of what your total capital gain is. Whatever tax you may pay down here to the IRS, you may claim as a tax credit on your T1 tax return…to the lesser of what the US tax credit is or the amount of the Canadian tax assessed.
For a cash buyer, there could be a possibility to sell your furniture… especially if it is a purchase as a vacation home and if they happen to like your furniture. You’re likely going to get a 20-30 cents on the dollar from what you paid but it will be American dollars don’t forget. Some of my clients have chosen to just come down, rent a U-haul and drive their furniture back home. U-Haul also offers a good container shipment service. I have had clients that speak highly of this method to get furniture home. Some sellers have temporarily put furniture into storage ( we can help with this) or consignment. While others have elected to come down a week or so early after placing a Facebook Marketplace ad to get furnishings & decor sold. A little bit of furniture hassle to make tens of thousands of dollars from selling your house.
The market here is very active so if you’re thinking of selling, your timing is good. I have an accountant that can file your tax return very economically. I know that you will have more questions if you’re contemplating selling.
Please feel free to either call me at 888-494-8558 or email me by filling out a contact form on this site or at lavineteam@gmail.com
