Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interest. What Canadians Need to Know!
You know from reading our blog “What Non-U.S. Citizens Need to Know Regarding the Sale of US Real Estate” that as a Canadian or non-resident of the US you will be subject to a non-resident withholding tax of 15% of the gross sales price. That said, is there a way for the withholding tax to be eliminated or reduced?
There is, but you would need to apply for a withholding certificate before the transfer of the property. This would require that you file a Form 8288-B to apply for a withholding certificate to reduce or eliminate withholding. However, this should only be done if the seller is exempt from tax or can show that their maximum tax liability is going to be less than the tax otherwise required to be withheld.
The form itself is not difficult to complete but there are often other obstacles. Is the buyer willing to hold the withholding in trust until the withholding certificate is received? As the buyer can potentially be liable for the withholding, they can be nervous about not sending it in right away. If the closing date occurs before the withholding certificate is received, the buyer, or quite often the escrow company on their behalf, can withhold the funds and hold them in trust until the certificate arrives. Once they receive the withholding certificate, escrow can release the funds to you, or if instructed, send all or a portion of those funds to the IRS within 20 days of receipt of the certificate.
If the purchaser is not willing to hold the withholding in trust, which we are finding to be the case increasingly often, there is no point in filing the form other than to perhaps provide an opportunity to request an early refund. If the purchaser is amicable and the certificate will be requested, then all information requested by the IRS as part of the application process must be provided or the request will be rejected. Documents that must be provided include:
- Original purchase documents,
- Documentation (receipts) supporting any capital improvements
- Contract of sale,
- Copy of the certificate of non-foreign status furnished by the person from whom the property was purchased (signed at the time of your original purchase), or evidence that the required withholding took place, and
- A calculation of your maximum tax liability based on all the documentation provided
- This includes any depreciation claimed on your rental returns, note that if the property was rented during ownership, U.S. tax returns were required to be filed unless 30% of the gross rents were remitted to the IRS.
Once the certificate application is completed and forwarded to the IRS, they will review and send the withholding certificate, usually within 90 days (pre-Covid19). Sounds easy right? The information required for the form that we find can be most challenging to obtain are the buyer’s name(s), addresses, and tax ID numbers (see more info on Tax ID numbers below). While this does not sound difficult, we have found that most purchasers do not like to give out their US Social Security Number; and who can blame them with so much identity theft currently happening?
In addition, for Form 8288-B all parties involved need a US Tax ID Number or ITIN. The IRS identifies every taxpayer by a number. If you are an individual that is not a US citizen or are not eligible to work in the U.S., you would need to apply for a US “Individual Tax Identification Number” (ITIN). For more detail on this, see our blog “How to obtain an Individual Tax Identification Number.”
There may also be State tax withholding certificates that can be applied for on the sale as well. Rules for each State are different and not discussed here but is something you should be kept in mind.
Once the withholding certificate has been received, if any amount of withheld tax is required, it must be forwarded to the IRS along with Forms 8288 (U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests), Form 8288-A (Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests), and a copy of the withholding certificate by the 20th day from the date of the withholding certificate.
The IRS will then stamp a copy of Form 8288-A to acknowledge receipt of the withheld funds and will send the stamped copy to the seller. Note that, if there is more than one foreign seller, the purchaser is required to prepare separate forms 8288-A for each seller, allocating the amounts based on the full amount being submitted.
A thing to remember is, even if no withholding tax is required to be submitted to the IRS, you are still required to file a Form 1040NR, Nonresident U.S. tax return to report the sale, and that return is due by June 15th in the year following the year of sale.