Do Canadians pay capital gains tax when selling US property?

What the US taxes when you sell

A non-resident who sells US real property files a Form 1040-NR for the year of sale and reports the gain the same way a US resident would: sale price minus selling costs minus your adjusted cost, which is the original purchase price plus improvements minus any depreciation claimed. Property held more than a year is taxed at long-term capital gains rates, which for most individual sellers land at 15% or 20% depending on the size of the gain.

If the property was ever rented out, the portion of the gain attributable to depreciation recapture is carved out and taxed separately at up to 25%, regardless of your overall rate on the rest of the gain. This applies whether or not you actually claimed the depreciation, because the IRS recaptures what you were entitled to claim, not only what you deducted. FIRPTA withholding at closing is a prepayment against this eventual bill, not a separate tax, and gets credited against what the 1040-NR shows is actually owed.

A short holding period changes the math. Property held a year or less is taxed at ordinary graduated rates rather than the lower long-term rates, which matters for a quick flip or a purchase-and-resale that closes within twelve months. Selling costs that reduce the taxable gain typically include real estate commissions, legal fees, and transfer or recording charges paid at closing, so keeping the closing statement from both the purchase and the sale is worth doing well before tax season.

How the state can add a second US tax

Several states tax the same gain again on a non-resident state return, layered on top of the federal 1040-NR. California, Hawaii and a handful of others are the ones Canadian sellers run into most, each with its own withholding mechanics and filing deadlines separate from the federal ones. Skipping the state return because the federal one is done is a common and expensive mistake, since the state withholding is not automatically refunded without a filing.

Why the exchange rate makes the Canadian gain a different number

Canada taxes the sale again, but not on the same US-dollar figure. The CRA requires the purchase price, improvements and sale proceeds to be converted to Canadian dollars using the spot exchange rate on each transaction date, not one rate applied to the whole deal. Because the Canadian dollar moved against the US dollar over the years you owned the property, the Canadian-dollar gain is almost never the same number as the US-dollar gain, and it is entirely possible to owe more Canadian tax on a property that barely broke even in US dollars, or the reverse, purely from currency movement.

Only half of a capital gain is taxable in Canada under the standard capital gains inclusion rules, the same as for a Canadian property. The foreign tax credit is then claimed on the federal return for the US federal and state tax you actually paid on the sale, up to the amount of Canadian tax otherwise payable on that same gain. Because the credit calculation runs country by country and often needs its own currency conversion, the two returns are best prepared together rather than the Canadian one being an afterthought once the US filing is finished.

When the principal residence exemption can help

A US home can qualify for Canada's principal residence exemption for the years you designated it as your main residence, the same as a Canadian home, provided you were a Canadian resident during those years and did not also designate a different property for the same years. This can shelter part or all of the Canadian-side gain on a US vacation home you genuinely lived in for stretches of the year, though it has no effect on the US tax, which still applies to a non-resident's US-source gain regardless of how the property was used personally. A household can only designate one property as its principal residence for a given year, so the exemption on a US vacation home usually means giving up the exemption on the Canadian home for the same years, and the better choice depends on which property has the larger gain. Confirm your specific designation and any overlap with a Canadian home with your accountant before assuming the exemption applies, since the rules tighten when more than one property is involved.

Why FIRPTA withholding is not the final answer

It is worth repeating because so many sellers stop here: the amount withheld at closing under FIRPTA is calculated on the gross sale price, not the gain, so it is frequently far more than the actual US tax owed. Filing the 1040-NR is what turns the withheld amount into the real tax bill and releases any refund. Sellers who never file simply leave that refund with the IRS.

How we handle US property sales for Canadian owners

We prepare the US 1040-NR (and the state return where one applies) and the Canadian T1 for the same sale together, so the cost base, the exchange rates on each relevant date, and the foreign tax credit are consistent across both filings rather than reconciled after the fact. For a rental property we also confirm the depreciation history before the sale closes, since it changes both the US recapture and the Canadian numbers. Our US rental property guide and cross-border tax services page cover how this fits together.

Source: IRS — FIRPTA withholding.