Certified Financial Planner Jason Heath answers two reader questions about selling foreign real estate and the tax consequences in Canada, the U.K. and the U.S. Below you’ll find clear guidance on reporting international property sales, calculating capital gains, claiming foreign tax credits and how tax treaties affect cross-border transactions.
- Selling property in the U.K.
- Selling property in the U.S.
Tax implications of selling U.K. real estate
Ask MoneySense
Recently I inherited a house in the U.K., and because of the pandemic and a slow market it took three years to sell. The property is now under offer. Do I pay capital gains tax in the U.K. or in Canada on the increase in value since the probate valuation? Is there a tax treaty that changes this? I’m a Canadian citizen and have lived here since 1990.
— Ian
Because you are a Canadian resident, Canada taxes your worldwide income, Ian. That means the sale must be reported on your Canadian tax return. Below is an overview of how to calculate the capital gain, how the U.K. treats non-resident disposals of property, and how foreign tax credits and treaties work to prevent double taxation.
Canadian taxes on U.K. real estate
For Canadian tax purposes, your capital gain is the difference between the fair market value of the property when you inherited it (the probate value) and the sale price. Both the inheritance value and the sale proceeds must be converted into Canadian dollars using the exchange rates that applied on those dates.
Costs that increase your adjusted cost base (ACB)—for example, capital improvements you paid for after inheriting the house—can reduce the taxable gain. Selling expenses such as real estate commissions, legal fees and other closing costs are deductible from the proceeds. Only 50% of the capital gain is included in taxable income in Canada. Depending on your marginal rate, the effective tax you pay on a large gain can be up to about 25% of the gross gain.
U.K. taxes on property sales
The U.K. taxes non-residents on gains from U.K. real estate. Disposals on or after April 6, 2020 must be reported to HM Revenue & Customs (HMRC) through the designated process for Capital Gains Tax on U.K. property. You can report directly or appoint a U.K. tax agent to handle the filing.
Keep in mind the U.K. tax year runs from April 6 to April 5, unlike Canada’s calendar-year tax year. The U.K. provides guidance and tools to help non-residents estimate any capital gains tax owing. For example, the U.K. allows an annual exemption that reduces the taxable portion of smaller gains; larger gains are then taxed at rates that can be broadly comparable to Canadian rates for high-income taxpayers.
Canadian foreign tax credits and reporting
To prevent double taxation, Canada allows a foreign tax credit for taxes paid to another country on income that is also taxable in Canada. The tax treaty between Canada and the U.K. confirms that tax paid in the U.K. on U.K.-source profits, income or gains can be credited against Canadian tax on the same income, subject to Canadian rules.
Foreign rental income from U.K. property is also taxable in Canada, but taxes paid abroad are generally creditable. Canadian residents who hold foreign property must also be mindful of reporting requirements such as Form T1135 (Foreign Income Verification Statement) when specified foreign property thresholds are exceeded. Personal-use real estate and tax-sheltered accounts are often exempt from that particular form, but rented or income-producing foreign property typically requires disclosure.
Reporting capital gains in multiple countries
In short, Ian: you should report the sale in both the U.K. and Canada. The U.K. tax paid on the gain can normally be claimed as a foreign tax credit on your Canadian return to reduce or eliminate double taxation. To lower the gain, be sure to document and claim eligible costs that raise your adjusted cost base and reduce the proceeds of disposition.
Tax implications of selling U.S. real estate
Ask MoneySense
We are selling our U.S. park home in Mesa, AZ. It has increased in value by about US$47,000. Will we owe capital gains tax in Canada or the U.S.?
— Mary & Vic
As Canadian residents, Mary and Vic, you must report worldwide income on your Canadian return. The U.S. also taxes gains on U.S. real estate held by non-residents. That means the sale can trigger tax obligations in both countries, with foreign tax credits available to mitigate double taxation.
U.S. tax rules for non-resident sellers
The U.S. allows certain exclusions and deferral options for qualifying owners, such as the principal residence exclusion (up to US$250,000 for an individual, US$500,000 for a married couple) for properties that meet the ownership and use tests. Like-kind exchanges may defer tax on sales of business or investment real estate when replaced with similar property, although rules have narrowed in recent years.
For a Canadian selling residential property in Arizona, there is generally no special exemption unless the home meets the U.S. residency and use conditions. Non-resident sellers typically face withholding at closing under the Foreign Investment in Real Property Tax Act (FIRPTA): a U.S. withholding agent will often hold back a portion of the sale proceeds and remit it to the IRS. Depending on the sale price and whether the buyer will use the property as a residence, withholding may be reduced or waived; you can also apply to the IRS for a reduced withholding if the actual tax liability will be significantly lower.
Whether the gain is short- or long-term depends on how long you owned the property. Long-term gains (ownership over one year) qualify for lower federal rates, with a maximum federal tax rate of 20% on capital gains for higher-income taxpayers, plus any applicable state tax.
You must file a U.S. tax return to report the sale. If too much was withheld, you may get a refund; if too little, you will owe additional tax. If you don’t already have one, you will need a U.S. Individual Taxpayer Identification Number (ITIN) for filing.
Canadian tax treatment of a U.S. sale
On your Canadian return you report the Canadian-dollar equivalent of the purchase price and the sale proceeds, using exchange rates at the relevant dates. Currency movements between purchase and sale can increase or reduce the Canadian-dollar gain compared with the U.S.-dollar result.
Canada permits a foreign tax credit for U.S. tax paid on the sale, which generally reduces your Canadian tax dollar-for-dollar on the same income, subject to rules and limitations. Canada also allows a principal residence exemption for properties you ordinarily occupied, even if located outside Canada; however, claiming that exemption for a U.S. property can have consequences. For example, designating the U.S. property as your principal residence for certain years could expose appreciation on your Canadian home for those same years to tax when that Canadian property is later sold. Also, if you pay U.S. tax but have no Canadian tax on the gain, recovery of U.S. tax paid can be limited because the IRS does not condition U.S. tax on whether Canada taxes the gain.
Selling property internationally — key takeaways
- Report the sale in both countries where required: the country where the property is located and Canada, since you are a Canadian resident.
- Convert purchase and sale amounts to Canadian dollars using the applicable exchange rates to determine your Canadian capital gain or loss.
- Claim eligible costs that increase your adjusted cost base or reduce proceeds to lower the gain.
- Claim foreign tax credits on your Canadian return for taxes paid abroad to avoid double taxation, subject to tax rules and treaty provisions.
- Be aware of withholding and filing obligations in the country where the property sits—for example, U.K. reporting for non-residents and U.S. FIRPTA withholding and filing requirements.
Further reading:
- Capital gains explained
- How capital gains tax is determined for a co-owned cottage
- Capital gains exceptions for commercial property
- Questions about historical capital gains exemptions