U.S. Real Estate and Taxes
Posted date : Sep 30, 2019.
We own a second home in Mesa, Arizona. I am aware that any capital gain on a real estate sale in the U.S. is reportable and taxable. There is also a 15% withholding tax on the sale price, unless the sale price is US$300,000 or less; then no withholding is required. In the future (and assuming that tax laws remain the same), if the property is sold at a price in excess of US$300,000, is some of the 15% withholding tax recoverable after filing and do I pay a capital gains tax on only the amount greater than US$300,000? Second, can I deduct any renovations, improvements or maintenance expenses incurred over the years against any capital gains tax, thereby reducing the sale price to less than the US$300,000 threshold? If so, how long do I keep the records of such renovations or improvements? In other words, is there a time limit for claiming such deductions? Thank you.
Michel Brisebois
Victoria, BC
Response :
Ed.: Mr. Weylie – our lawyer – replies:
Upon the sale of the U.S. property, there is a withholding of 15% of the sale price, (it cannot be reduced in any way) which funds must be sent to the IRS within 20 days of the closing. There is an exception if the sale price is less than $300,000.00 AND the property is going to be occupied by the purchaser or members of his/her family for at least 50% of the occupied time over the two years following the closing. There is also a procedure available where one can apply prior to the closing for an exemption certificate where one shows what the capital gain will be and the tax thereon, in which case only the amount of tax need be transmitted. This is complicated, and of course you need to have the certificate issued and received prior to the closing.
Capital gains tax is payable on the whole gain less any deductions. In calculating, the taxable gain deduction can be taken for the costs of purchase, costs of sale, and the costs of any improvements made to the property during ownership. Costs such as maintenance or taxes are not generally deductible. There is no time limit involved. Although it is best to have receipts, honest estimates can be used, as the tax return only deals in figures. The only time at which receipts might be necessary would be in the event of an audit.
A tax return must be filed in the year following the sale in every case, at which time the taxable gain is calculated, the tax thereon, and claim made for any excess funds transmitted. Tax is about 20%. Where property is owned by multiple owners, a return must be filed for each person as to their share of ownership.
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