Many times we have been asked questions about the taxes one would pay in Arizona surrounding the purchase and sale of Phoenix Arizona Real Estate.
First of all there is no such thing as a Real Estate Transfer Tax in Arizona. There is in many other states such as California and for those that live in the provinces of BC, Manitoba, Ontario, Quebec & Nova Scotia. But here in Arizona it was voted on in the last election two years ago and is banned in the state’s constitution……isn’t that a comfort?
Property taxes are relatively low here when you compare a similar size home to comparable neighborhoods in Canadian cities. You’ll be pleasantly surprise when you check the amount of taxes that are indicated on the MLS listing!! Primary occupants of homes in Arizona get to take advantage of a state tax aid credit that investment property owners and now recently, due to the ‘Jobs Bill’ that was passed, secondary residence home owners don’t qualify for either. However this amount is very small (less than $500 for the majority of our vacation homeowners) so the property taxes are still very low in Arizona.
Property taxes are always in arrears for billing purposes here….the tax bills from the county are mailed out in late August/early September to residents here requiring homeowners to pay half of their current year taxes by the end of October. The other half doesn’t get billed out till March of the following year for the last half of the previous calendar year’s taxes. When you purchase a property here, the escrow company will do a calculation to pro-rate the taxes and the sellers will give you a credit on the closing statement for the period of time that they owned the property but haven’t got billed for yet by the county. Then when you have to pay the outstanding amount you will already have had the benefit of the credit. They always base the calculation on what the previous year’s taxes are and the current year is not known till the last few days of August each year.
If you ever decide to sell a property here you will be required to file a tax return with the IRS in case there is a capital gain realized just like you would in Canada for a secondary residence or investment property.
If you do own a rental property down here then you will be required to file a tax return to report the income just as you would in Canada. Tax rates are the same for foreign nationals as they are for residents. We have our taxes done by a local accountant at a firm that has expertise filing tax forms for Canadians.
–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 in Canada resulting in a capital gain to the Canada Revenue Agency. In order to file a tax return, you’ll 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 an ITIN on a W7 form when you file your tax form (a 1040NR and a 104NR in AZ). 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 Passport Canada) to send in with your W7. An alternative to acquiring a certified copy of your passport is to have your current Passport acknowledged by an IRS Acceptance Agent who in turn completes a form and exempts you from having to get a certified copy. I have referrals locally for acceptance agents.
–If the sale of your home is under $300000, there is an exemption in place for the 10%-15% tax withholding that can occur at closing time. Providing that the buyer for your home intends to use the home for their personal use and not to rent it out, 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 specify on the 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 (providing that the buyer is buying the home as a personal residence) 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 home that is under $300,000 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% and so if your net gain after allowable expenses is $50000, you will owe $7500 to the IRS. Arizona tax rate is currently at 2.98% of the net gain. 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 the USA. Fortunately, there is a tax treaty in place between Canada and the USA. This was put in place to avoid double-taxation. 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. Because you report in US dollars to the IRS, you won’t be taxed on potential currency exchange gains like you will when you file your T1 with the CRA. In Canada you pay tax on half of what your total capital gain is. Whatever tax you may pay down in the USA, you may claim as a tax credit on your T1 tax return.
For any questions about this topic or for any others regarding Phoenix Real Estate please send us an email or call our toll free cell at 1-888-494-8558
