To Do List For Canadians Selling US Real Estate
Canadians who own Florida real estate and wish to sell or are interested in purchasing Florida real estate should be informed of the specificities of selling. What are the seller’s obligations at closing? What US and Canadian tax compliance obligations apply to Canadians who sell Florida real estate? Here is a checklist of the terminology and key issues of selling Florida real estate.
1. Title Searches and Lien Searches
In Florida real estate transactions, the seller must conduct title searches and lien searches on the property to identify any title defects or liens. If the searches reveal title defects or liens, the seller must clear these defects or liens prior to closing to ensure that the buyer takes the property with clear and free title. These searches are in really carried out by the title company for a given real estate transaction.
2. Open and Expired Permits
Renovation and repair work on Florida properties require that the owner and/or contractors first obtain permits. If a permit remains on the property, the buyer will not be able to carry out further work until closing the existing open permits and/or expired permits. These types of permits are discovered through a lien search conducted prior to closing.
A permit is “open” in one of the three (3) following situations: (i) the permitted work was not completed and the contractor never closed the permit; (ii) the work was completed, but the contractor did not take all of the steps required to close the permit; and (iii) the work was completed and the contractor took the requisite steps to close the permit, but the city did not input this information into its system.
3. Estoppel Letters
If a property belongs to a condominium association or a homeowner’s association, one condition for closing is obtaining an “estoppel letter” from the association. This document is a certificate, signed by an officer or an authorized agent of the association, that states the condominium and maintenance fees owed through a given date. On the basis of this letter, condominium and maintenance fees are prorated between the buyer and the seller since real estate closings usually occur between two dates on which condominium and maintenance fees are due.
If a condominium association levies maintenance fees of $600 USD on a monthly basis payable on the first (1st) day of each month and the closing date is on the fifteenth (15th) day of September, the Seller will owe a portion of these fees equal to the first fifteen (15) days of the month, which will equal $300 USD, and the Buyer will owe a portion of the fees for the remainder of the month, which will equal $300 USD. In reality, the Seller will pay the fees for the entire month of September and the Buyer will owe the Seller the amount corresponding to the second half of September, which will equal $300 USD.
4. Notice of Commencement
A notice of commencement is published by the owner of a property before beginning construction work on the property to inform the public of this work. When a condominium association carries out repairs or renovations on the building or common elements, it will publish a notice of commencement before commencing the work. The notice is not a lien by itself; however, failure to pay contractors for work on a property after publication of the notice of commencement will result in a lien.
As a part of any real estate closing, the seller must terminate a notice of commencement by obtaining an affidavit from the contractor that it has been paid in full or, in the case of a condominium unit, obtain an affidavit from the condominium association that it has sufficient funds to cover the contractor’s fees.
5. Special Assessments
Special assessments are assessments imposed upon condominium unit owners other the standard assessments required by the condominium association’s annual budget. They are levied to cover the cost of repairs or renovations to the building or common elements. Unlike standard assessments, special assessments are levied on a punctual basis and may be paid in a lump sum or in installments. In preparing a real estate contract, it is important to stipulate if the seller will pay the entirety of the special assessment or if the payment of the special assessment will be prorated between the buyer and the seller.
6. Documentary Stamp Tax
Unlike in Canada, buyers do not pay a transfer tax when purchasing Florida real estate. Instead, sellers pay a transfer tax to the State of Florida on the sale of real estate. This transfer tax is called “Documentary Stamp Tax”. It is a flat 0.7% tax on the sale price of the property.
7. Who Pays for the Closing Costs?
Closing costs in a real estate transaction include title and lien searches, title insurance premiums, estoppel letter fees, documentary stamp tax, recording fees for deeds, etc. Some of these costs can be allocated between the buyer and the seller. Other costs are solely the responsibility of the buyer or the seller. The allocation of closing costs is a key consideration in a Florida real estate purchase and sale contract.
8. Foreign Investment in Real Property Tax Act (FIRPTA)
Pursuant to the US Foreign Investment in Real Property Tax Act (FIRPTA), Canadians who sell US real estate are subject to a mandatory 15% withholding on the gross sale proceeds. The buyer is required to withheld 15% of the gross sale proceeds and remit this amount to the Internal Revenue Service (IRS) within 20 days of the closing date. This withholding is usually carried out by the title agent. There are a few exceptions to this mandatory withholding. If you own US real estate and are considering selling, our team can advise you on whether you qualify for any of the exceptions to the mandatory FIRPTA withholding.
9. File US and Canadian Tax Returns
A Canadian who sells US real estate must file a US tax return to report the sale of the property. In addition, the seller must report the sale in his or her Canadian tax returns. Depending on how title to US real estate is held, Canadians may claim a foreign tax credit in Canada for tax paid in the United States, or they will be subject to double taxation in the United States and Canada. If you own US real estate, our team can review how you hold title to the property to determine if you are potentially exposed to double taxation on the sale of the property.
The comments offered in this article are meant to be general in nature and are not intended to provide legal advice regarding any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate for your circumstances.
About the author
Shlomi Steve Levy is a Partner of Levy Salis LLP and is a member of the Quebec Bar, the Law Society of Ontario (L3), the Society of Trust and Estate Practitioners, and the Canadian Bar Association.
Sergei Titorenko is an Associate at Levy Salis LLP and a member of the Quebec Bar. He devotes his practice to US and Canadian tax and estate planning, Canadians doing business in the United States, Americans living in Canada, US real estate transactions for Canadians, and cryptocurrency transactions.