Canadian-Owned US Real Estate: Estate Tax, FIRPTA and Rental Income

Canadian-owned US real estate comes with three separate tax exposures that many buyers do not price in: U.S. estate tax at death, withholding when the property is sold, and tax on rent while you own it. A Canadian who dies owning a Florida, Arizona or Illinois property is a "nonresident not a citizen" for U.S. estate tax, and the United States taxes U.S.-situated assets even though the owner never lived there. The treaty usually prevents a large bill, but only if the estate claims it correctly. This guide sets out the exposure, the treaty relief and the practical steps for snowbirds, investors and heirs in Toronto, Calgary and Vancouver.

How does the estate tax reach Canadian-owned US real estate?

For a nonresident not a citizen, the IRS taxes the U.S.-situated gross estate. That includes U.S. real estate, tangible property located in the United States, U.S. marketable securities, debts of U.S. persons, and U.S. business interests. Bank accounts not used in a U.S. business, portfolio-interest debt and certain life insurance proceeds are treated as outside the United States. The executor may deduct funeral and administration costs, claims, mortgages and some other items, but nonresidents cannot elect portability of a deceased spouse's unused exclusion.

Without the treaty, the maximum unified credit for a nonresident is generally $13,000 according to the Form 706-NA instructions, which leaves even a modest property exposed. The treaty fixes that. Article XXIX B(2) gives the estate of a Canadian resident a unified credit equal to the greater of (a) the credit allowed to a U.S. citizen's estate multiplied by the ratio of the U.S.-situated gross estate to the worldwide gross estate, and (b) the credit a nonresident would receive. The credit is reduced by any credit used for earlier gifts. If the surviving spouse also qualifies, paragraph 3 allows a separate marital credit when the executor elects it and waives the marital deduction. Canada also gives relief: paragraph 6 lets U.S. estate tax paid be deducted from Canadian tax in defined cases. See the treaty guide.

Estate tax steps for the executor

1. Value the worldwide estate and the U.S. part at fair market value on the date of death.
2. Check the filing trigger. If U.S. assets plus adjusted taxable gifts exceed $60,000, file Form 706-NA within nine months of death. An extension on Form 4768 gives more time to file but not to pay.
3. Complete Schedules A and B and compute the treaty credit.
4. Attach Form 8833 disclosing the treaty-based position, the pro rata unified credit computation, and a copy of the return filed in Canada (or an explanation of why none was due).
5. Obtain transfer certificates where banks or title companies require them before releasing assets.
6. File Form 8971 and other information returns if applicable, and deal with the Canadian final return on the Canadian side.

What about rent, gains and gifts?

The buyer reports FIRPTA withholding on Forms 8288 and 8288-A by the 20th day after the transfer. The seller files Form 1040-NR and attaches Form 8288-A to claim credit. A seller who expects a smaller tax bill can ask for a withholding certificate on Form 8288-B, and the IRS says it normally acts within 90 days of receiving all required information, so start before the closing. An individual taxpayer identification number is needed to file; see SSN and ITIN.

Documents to gather

• Deed, purchase contract, closing statement and any mortgage statements
• Estimated fair market value on the date of death, or an appraisal
• Worldwide asset listing in U.S. dollars at the date of death
• Canadian final return or evidence of why no return was due
• Death certificate, will, and trust documents
• Rental ledgers, property tax bills, and prior U.S. returns

Deadlines and penalties

Form 706-NA is due nine months after the date of death. The IRS FAQ confirms extensions to file are available for up to six months, but tax is still due on the original date and interest runs. FIRPTA withholding forms are due by the 20th day after transfer. A 1040-NR for rental income follows the nonresident calendar, typically June 15 for people without U.S. wages. This guide does not quote penalty rates; ask us for current late-filing and late-payment amounts.

Worked example

Gurpreet and Simran live in Brampton. Gurpreet owns a Phoenix condo worth US$420,000, in his name alone, and their worldwide estate is about US$2.3 million. If Gurpreet dies in 2026, the U.S.-situated estate of $420,000 is above $60,000, so the executor files Form 706-NA. The condo is about 18% of the worldwide estate, so the treaty credit is about 18% of the credit a U.S. citizen's estate receives, which is tied to the $15,000,000 exclusion for 2026 deaths. That credit far exceeds the tax computed on $420,000, so no U.S. estate tax should be due, but only if the estate files, attaches Form 8833 and documents the Canadian side. The same facts without a treaty claim would leave only the small nonresident credit and produce a substantial tax bill. The figures are hypothetical.

Mistakes to avoid

• Assuming that a Canadian will, or Canadian probate, resolves U.S. estate tax.
• Skipping Form 706-NA because "the treaty says no tax"; the treaty credit must be claimed.
• Holding the condo jointly with a child without checking gift and estate effects.
• Putting the property into a Canadian corporation without Canadian and U.S. advice.
• Letting the closing agent withhold 15% without asking for a certificate when the gain is small.
• Forgetting that U.S. stock in a Canadian brokerage account also counts as U.S.-situated property.

How we can help

We are a U.S. CPA firm in the Aurora and Fox Valley area of Illinois. We prepare Form 706-NA, treaty computations, Form 1040-NR for rental or sale gains, ITIN applications and withholding certificate requests, and we coordinate with your Canadian CPA, who handles the T1, T1135 and the Canadian final return. See real estate investor tax, cross-border tax services and relocation and immigration tax planning. Related: snowbird Form 8840 and the cross-border hub.

Frequently asked questions

General information only. It is not tax, legal, accounting or immigration advice for your situation, and rules change; confirm the current rules with the official source or a licensed professional in the relevant country.