Selling Your US Rental as a Canadian: FIRPTA Explained

I built my own US rentalportfolio to hold forever, not to flip, and I tell every client the same thing: the real return in US rentals is made by holding them for years while the tenant pays down the mortgage and inflation does the quiet work in the background.

So selling should be the exception, not the plan. But you never know, right? So you should still understand your exit strategy - and its tax implications - before you ever need it, because the US tax on a sale often catches out the Canadians who never saw it coming.

The headline that often scares people is FIRPTA, where the IRS withholds a chunk of the entire sale price on the day you sell. It looks brutal. In reality it's a prepayment of the capital gains tax you'll owe, not an extra tax. Let me walk you through what actually happens, on both sides of the border.

First, the mindset: you bought to hold

Before we get into the nitty gritty, a bit of context is helpful. If you bought a good US rental in a good neighborhood, the smart move is usually to keep it. That's what I plan for, and the strategy works precisely because time is on your side: rent services the mortgage, the debt shrinks in real terms, and the asset grows while you do very little.

So selling your property ahead of schedule ends that compounding effect, triggers taxes, and puts you right back to square one looking for the next deal.

So I'm definitely not writing this to talk you into selling. I am writing it so that when a real reason to sell does come along, a life change, a portfolio reshuffle, an offer too good to ignore, you already know how the tax part works and you're not blindsided at the closing table.

What FIRPTA actually is

FIRPTA stands for the Foreign Investment in Real Property Tax Act. It exists because the US wants to be sure a foreign seller actually pays US tax on the sale of US property before the money leaves the country.

The mechanism is blunt, but effective, and not entirely inaccurate.

When a foreign person sells US real estate, the buyer is required to withhold 15% of the gross sale price and send it to the IRS. Note that word gross. It is 15% of the whole sale price, not 15% of your profit. Sell a property for $250,000 and $37,500 is withheld, even if your actual gain is a fraction of that. That's the number that makes people panic, and I understand why.

The reframe: FIRPTA is a prepayment, not a tax

Here's the part that calms everyone down. FIRPTA withholding is not a tax. It is a deposit against the US capital gains tax you will owe on the sale. It's held by the IRS until you file your actual tax return with the true CGT amount properly calculated, and settle the bill.

When you file your US return for the year of the sale, you calculate your actual tax on the actual gain. If the amount withheld was more than your real tax, and it very often is, the difference is refunded to you. The withholding is the IRS making sure it gets paid. It is not the size of your bill.

A simplified, illustrative example on a $250,000 sale, ignoring state tax and assuming a 15% capital gains bracket:

More than half of what was withheld comes back. It just takes a filing to get it.

Don't let the IRS sit on your money

The obvious problem with the above is cash flow: the IRS is holding your $21,250 for months before you file and get it back. There is a way to avoid that.

Before closing, you, or your buyer, can apply to the IRS for a withholding certificate using Form 8288-B. It asks the IRS to reduce the withholding to your actual expected tax rather than the flat 15% of the sale price. If it is approved, the buyer only holds back the smaller amount, and your money is not tied up.

There are also lower rates built into the rules: the withholding drops to 10% when the price is between $300,001 and $1,000,000 and the buyer will live in the property, and to zero at $300,000 or less on the same buyer-residence condition. Most investor sales do not qualify for those, which is exactly why the certificate route matters. You can read the IRS rules on FIRPTA withholding directly.

Your actual US tax, and the recapture people forget

Once the withholding noise is stripped away, your real US tax on the sale has two parts.

The first is capital gains tax on your actual gain, the sale price less what you paid and less your selling costs. Held for more than a year, that gain is taxed at the long-term capital gains rates, which for most sellers means 15%.

The second is the one people forget, and it can sting: depreciation recapture. Every year you held the rental, you deducted depreciation, which lowered your US taxable rental income, often to nothing, as I cover in my US tax guide for Canadian investors. When you sell, the IRS recaptures that benefit. The portion of your gain that came from depreciation is taxed at up to 25%, higher than the capital gains rate. You enjoyed the deduction while you held the property, and you settle up for it on the way out. It is not a penalty, it is just the other end of a benefit you already used, but sellers who forget it get an unpleasant surprise. Both parts are reported on a US non-resident return, Form 1040-NR, for the year of the sale.

The Canada side: the treaty, and a currency twist

You are a Canadian resident, so Canada taxes your worldwide income, which means you also report the gain at home. In 2026 the Canadian inclusion rate is 50%, so half of your gain is added to your income and taxed at your marginal rate. (The proposed increase to two-thirds was cancelled and never became law, so it remains 50%.)

Reporting the same gain in two countries sounds like double taxation, but it is not, because of the treaty. The US has the first right to tax a gain on US real estate, and Canada then gives you a foreign tax credit for the US tax you paid. In practice you end up paying roughly the higher of the two countries' tax on that gain, once, not twice.

Then there is the currency twist that catches people. Canada calculates your gain in Canadian dollars. Your cost is converted at the exchange rate on the day you bought, and your proceeds at the rate on the day you sold. So the Canada to US exchange rate can move your Canadian gain up or down independently of your US gain. If the Canadian dollar weakened over your hold, your gain in Canadian dollars can be noticeably larger than it looks in US dollars. The CRA is explicit that you report the gain in Canadian dollars using the exchange rate on the transaction date.

The whole sequence, in order

Start to finish, a Canadian selling a US rental looks like this:

1. Decide to sell, and get your cost records together: purchase price, closing costs, capital improvements, and the depreciation you claimed.
2. Before closing, if the flat 15% will exceed your real tax, file Form 8288-B for a withholding certificate.
3. At closing, the buyer withholds the required amount and remits it to the IRS, giving you a stamped Form 8288-A as proof.
4. File Form 1040-NR for the sale year, report the capital gain and the depreciation recapture, apply the withholding, and collect any refund.
5. Report the gain on your Canadian return at the 50% inclusion rate, and claim the foreign tax credit for the US tax paid.

None of this is a do-it-yourself job, which brings me to the last point.

What to actually do

Plan the exit before you need it, not in the fortnight before closing. If you are likely to owe far less than the 15%, start the Form 8288-B process early so your money is not tied up.

Keep meticulous records of your cost base and, especially, the depreciation you have claimed, because that is what drives the recapture. And use a cross-border CPA who files both the US and Canadian sides, because the treaty, the foreign tax credit, and the currency conversion all have to line up across two returns to work properly.

This is the natural bookend to the other cross-border tax event people forget, which I cover in do Canadians pay US estate tax on a US rental property. The wider process of owning from Canada is in my Canadian guide to buying US rentals, and your ownership structure, covered in my guide to LP vs LLC for Canadians, also shapes how the sale is reported. You can plan your numbers with the free tools in my foreign investor starter kit.

The bottom line

Selling a US rental as a Canadian is not the tax nightmare the FIRPTA headline suggests.

The 15% withholding is a refundable prepayment, not a bill, and you can shrink it up front with a withholding certificate. Your real cost is capital gains tax plus the depreciation recapture you should see coming, and the treaty makes sure Canada gives you credit for the US tax rather than charging you twice. Know all of this before you sell, and the exit is orderly rather than alarming.

Remember, this is a game of probabilities, and the odds still favor holding. But when selling is the right call, go in with the numbers and the paperwork planned, and it is just another transaction.