Selling Property in Canada as a U.S. Expat: U.S. Tax Guide

U.S. tax on foreign real estate sales

U.S. citizens are taxed on worldwide capital gains, including gains from the sale of real estate located abroad. The gain is generally the difference between the amount realized and the adjusted basis, both measured in USD using the applicable exchange rates. Purchase price, selling costs, improvements, and allowable adjustments can change basis, but the measurement is always in USD. A property that sold for the same number of Canadian dollars as its purchase price can still produce a U.S. gain if the Canadian dollar strengthened against the U.S. dollar.

Currency effects

The gain is calculated in USD using the exchange rate at purchase and the exchange rate at sale. A property that did not change in local currency value can still produce a U.S. gain or loss if the currency moved. This is a common source of surprise for expats selling foreign property. Keep the exchange-rate source and date with the closing statement, because later reconstruction is often impossible.

Principal residence exclusion

The principal residence exclusion may apply to a foreign home if the ownership and use tests are met. The exclusion is not limited to U.S. property. The tests require that the property was owned and used as a principal residence for at least two of the five years before the sale. Nonqualified use, second homes, and rental use can reduce or eliminate the exclusion. The exclusion is not a loss deduction, and a loss on the sale of a personal residence is generally not deductible.

Foreign tax credit

Canadian tax on the sale may qualify for the Foreign Tax Credit, which can reduce U.S. tax. The credit is subject to sourcing rules, limitation categories, and the requirement that the foreign tax be a qualifying income tax. Not all foreign charges are creditable. Withholding is a payment on account and must be reconciled to the qualifying final foreign income tax, including refunds; penalties and interest are not income taxes. Reconcile the Canadian computation with the U.S. computation before claiming the credit.

Canada-specific points

A non-resident selling taxable Canadian property generally must notify the CRA within 10 days of disposition using Form T2062 or T2062A and pay or provide acceptable security before a certificate of compliance is issued. If no certificate is issued, the purchaser may have to withhold 25% of the proceeds, or 50% for certain depreciable, resource, or inventory property. That withholding is a payment on account, not final tax, and the final Canadian liability is settled when the non-resident's tax return is assessed. The CRA can charge $25 per day, with a $100 minimum and $2,500 maximum, for late notification. Treaty or security arrangements can change the amount required before closing, so the clearance process should start before listing or at least before closing.

Reporting

The sale is generally reported on the U.S. return, typically on Form 8949 and Schedule D, even if there is no gain or if a loss is realized. The reporting requirements depend on the facts and the character of the property. Keep purchase and sale contracts, improvement invoices, rental history, currency records, and evidence of principal-residence use.

Common mistakes

• Calculating the gain in local currency instead of USD.
• Ignoring currency effects on basis and amount realized.
• Assuming the principal residence exclusion does not apply to foreign property.
• Treating Canadian withholding as the final Canadian tax.
• Not claiming the Foreign Tax Credit for foreign tax paid on the sale.
• Failing to start the Section 116 clearance process before closing.
• Failing to document purchase and sale dates, prices, and exchange rates.

How the U.S. gain is calculated

The U.S. amount realized includes the sale price plus liabilities assumed by the buyer, less selling expenses such as broker commissions, legal fees, and transfer taxes. The adjusted basis includes the original purchase price, acquisition costs, capital improvements, and certain settlement charges, reduced by depreciation or casualty losses. Both sides are converted to USD. If the property was rented, depreciation can reduce basis and may be recaptured. If the property was inherited, basis may be stepped up or down depending on the facts and the decedent's status. A foreign-currency mortgage can create a separate foreign-currency gain or loss on repayment, which is not part of the property gain and may be reported elsewhere.

Records that support the return

Keep the purchase contract, closing statements, proof of improvements, rental and depreciation schedules, loan documents, and evidence of days of personal use. Keep bank records showing the exchange rate used for each payment and receipt. If a treaty or foreign tax credit is involved, keep the foreign assessment, withholding certificate, and proof of payment. If Section 121 is claimed, keep evidence of ownership, residence, and any periods of nonqualified use. If the property was sold at a loss, keep evidence that it was not a personal residence and that the loss is otherwise allowable.

When the foreign result differs from the U.S. result

Canada tax may use different timing, currency, exemptions, or cost rules than the U.S. A Canada exemption, withholding, or reduced rate does not by itself remove U.S. tax. The Foreign Tax Credit is limited to foreign income tax attributable to the same income and may not absorb all U.S. tax. Compute the U.S. gain first, then reconcile the foreign tax to that gain rather than relying on the foreign closing statement.

Planning the filing before closing

Before closing, model the U.S. gain in USD using a consistent exchange-rate source and decide whether Section 121 is available. If the property was rented, compute depreciation recapture separately from the capital gain. If foreign tax will be paid, estimate the foreign tax credit limitation by category and carryover. If the seller is a non-resident of the country where the property is located, confirm withholding, clearance, or reporting deadlines before signing. If the property is jointly owned, allocate gain, basis, and foreign tax to each owner. If the sale spans tax years or involves an installment sale, document the timing of payments and currency conversions.

A pre-closing review should also test whether the property qualifies as a principal residence for U.S. purposes, whether any period of nonqualified use applies, and whether a loss is actually deductible. These questions are easier to answer before the sale than after the funds have been moved.

Next steps

FileAbroad reviews the purchase, sale, currency, and foreign tax facts to determine the U.S. reporting. Use the intake form to describe the property, country, and tax years involved. See also: Foreign Inherited Property Sale Guide, Foreign Tax Credit Guide.