FIRPTA Withholding for Canadian Sellers of US Rental Property

You bought a US rental property through your LLC, collected years of cash flow, and now you are ready to sell. Your buyer’s closing agent sends you a form mentioning FIRPTA withholding and suddenly 15% of the sale price is at stake — before you see a dime of proceeds.

This is normal for Canadian sellers of US real property. The Foreign Investment in Real Property Tax Act (FIRPTA) requires the buyer to withhold a portion of the purchase price and remit it to the IRS when the seller is a foreign person. It is not a penalty. It is a prepayment mechanism that ensures the US gets its share of tax on the gain. But it can create a serious cash-flow problem at closing if you are not prepared.

This article is educational only. LendCity is a licensed mortgage brokerage, not a tax firm or a law firm. Any discussion of FIRPTA withholding, ITIN requirements, or qualified intermediary procedures is general information — not advice for your specific sale. Work with a cross-border CPA and tax lawyer before closing.

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What FIRPTA Is and Who It Applies To

FIRPTA treats gains from the disposition of US real property by foreign persons as subject to US taxation. “Foreign person” includes non-resident individuals, foreign corporations, and foreign partnerships or trusts — which covers most Canadians selling US rental property held in an LLC or LP structure.

The buyer (or their closing agent) acts as the withholding agent. They are legally required to withhold from the gross sale price and send it to the IRS, unless an exemption or reduced withholding certificate applies.

This applies to investment property sales — not typically to your personal US vacation home if it qualifies for an exemption, but that is a separate analysis. For rental property investors, assume FIRPTA applies until your cross-border CPA confirms otherwise.

For broader tax planning context, see our US real estate tax-smart investing guide for Canadians.

Standard Withholding Rate: 15% of Gross Sale Price

The default FIRPTA withholding rate is 15% of the amount realized — essentially the gross sale price, not your net profit after mortgage payoff and closing costs.

Example: You sell a US rental property for $400,000 USD. The buyer’s closing agent withholds $60,000 (15%) and remits it to the IRS. You receive the remaining proceeds after the mortgage is paid off and closing costs are deducted — minus that $60,000 holdback.

If your actual US capital gains tax on the sale is $25,000, you file a US tax return for the year of sale and claim a refund of the $35,000 excess withholding. That refund takes time — often months after filing.

This is a cash-flow issue, not necessarily a tax loss. But if you were counting on those proceeds to fund your next deal, the 15% holdback hurts.

Cross-border tax disclaimer: Actual tax owed depends on your cost basis, depreciation recapture, holding period, entity structure, and treaty provisions. The 15% withholding rate is the default statutory rate — your cross-border CPA calculates what you actually owe.

Cross-border investing adds layers of complexity to your financing — book a free strategy call with LendCity and we’ll walk you through the Canadian-friendly options.

When the Rate Is Higher or Lower

10% rate for sales under $1 million (personal use property): If the property was used as a personal residence meeting specific IRS tests, a reduced 10% rate may apply on the first $1 million. Most rental property sales do not qualify — but if you converted a former residence to a rental, ask your CPA.

Zero withholding with a withholding certificate: Before closing, you can apply to the IRS for a FIRPTA withholding certificate (Form 8288-B). If approved, the IRS specifies a reduced withholding amount based on your estimated actual tax liability. This is the primary tool for reducing the cash-flow hit at closing.

Exemptions for certain entity types and transactions: Some intra-group transfers and REIT transactions qualify for exemptions. Standard Canadian investor LLC sales rarely qualify — but your tax lawyer should confirm.

ITIN Requirements for Canadian Sellers

To file a US tax return and claim a FIRPTA refund, you need a US tax identifier. Most Canadians use an Individual Taxpayer Identification Number (ITIN).

If you already obtained an ITIN when you bought the property or filed US rental income returns, you are set. If not, apply using Form W-7 well before closing — not at the settlement table. See our guide on getting your US ITIN.

Investing in the U.S. from Canada is a smart move, but only if your financing is structured correctly — schedule a free strategy session with us to avoid the common pitfalls.

When to Use a Qualified Intermediary (QI)

In FIRPTA transactions, the Qualified Intermediary is typically the buyer’s closing agent or title company — not a 1031 exchange intermediary. They calculate withholding, hold back the required amount from seller proceeds, and file Form 8288 and Form 8288-A within 20 days of closing.

Before your closing date, confirm the agent has FIRPTA experience with Canadian sellers, provide your ITIN or withholding certificate, and review the settlement statement carefully. Keep copies of all FIRPTA forms for your US tax return.

If you are doing a 1031 exchange, FIRPTA withholding may still apply unless you obtain a withholding certificate or qualify for an exchange-specific exception. Confirm with your cross-border CPA first.

How to Reduce FIRPTA Withholding Before Closing

Apply for a FIRPTA withholding certificate (Form 8288-B) 60–90 days before closing. Your cross-border CPA prepares the application with estimated tax based on cost basis, depreciation taken, and selling costs. IRS processing takes 30–90 days. If approved, the closing agent withholds the reduced amount instead of the default 15%. Without a certificate, budget for the full holdback.

Canadian Tax Reporting on the Same Sale

Selling US property triggers filing obligations in both countries:

• US: File Form 1040-NR (or appropriate return) reporting the capital gain. Claim the FIRPTA withholding as a credit against tax owed. Request refund of any excess.
• Canada: Report the capital gain on your T1 Schedule 3. Claim a foreign tax credit for US tax paid under the Canada-US Tax Treaty to avoid double taxation.

Depreciation recapture is a common surprise. If you claimed depreciation on your US returns during the hold period, part of the gain may be recaptured at ordinary income rates in the US — increasing the actual tax above a simple capital gains calculation.

Your cross-border CPA coordinates both filings. Do not file one country without considering the other.

Pre-Sale Checklist for Canadian US Property Sellers

Start at least 90 days before listing: confirm your ITIN is active, gather cost basis and depreciation records, engage a cross-border CPA, discuss a withholding certificate application, confirm your closing agent handles FIRPTA, and model after-tax proceeds including the full 15% holdback scenario.

FIRPTA is manageable when you plan for it. It is painful when it shows up as a surprise line item on your settlement statement a week before closing.

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This content is for informational purposes only and does not constitute tax, legal, or financial advice. FIRPTA rules, withholding rates, and filing requirements are subject to change. Always consult a qualified cross-border CPA and tax lawyer before selling US property.