Rent or Sell? Tax Considerations for Snowbirds Returning to Canada

Cross-Border Tax Planning for U.S. Homeowners

When deciding whether to rent or sell a U.S. home before moving back to Canada, snowbirds face distinct cross-border tax planning issues around capital gains, depreciation, and withholding taxes. This decision isn’t purely financial—it’s also strategic, with long-term implications for cash flow, retirement planning, and estate distribution. Navigating the intersection of U.S. and Canadian tax laws requires foresight and careful structuring to avoid unnecessary taxes and compliance headaches.

This article explores the key cross-border issues that arise when a Canadian snowbird decides whether to keep a U.S. property as a rental or sell it outright. We’ll cover U.S. withholding tax under FIRPTA, Canadian and U.S. capital gains rules, rental income reporting obligations, and how integrated cross-border wealth management helps align real estate decisions with long-term financial and estate planning goals.

1. Understanding the Cross-Border Homeowner Dilemma

Thousands of Canadians spend winters in the U.S.—often in states like Florida, Arizona, and California—where sunshine and lower costs of living create an ideal retirement lifestyle. But when circumstances change, whether due to health, family, or shifting exchange rates, many snowbirds consider moving home to Canada full-time.

At that point, a crucial question arises: what should you do with your U.S. property?

Selling may seem straightforward, but cross-border taxation complicates the picture. Renting can preserve an appreciating asset and provide income—but it also exposes the owner to ongoing U.S. filing requirements, state-level taxes, and future capital gains implications.

Your U.S. home sits within two overlapping tax regimes. The Internal Revenue Service (IRS) and the Canada Revenue Agency (CRA) both claim taxing rights, and understanding how those interact can make a major difference in after-tax outcomes.

2. FIRPTA: The U.S. Withholding Tax When Selling Property as a Nonresident

One of the most significant considerations when a Canadian sells U.S. real estate is the Foreign Investment in Real Property Tax Act (FIRPTA). FIRPTA ensures that the U.S. collects tax on gains from U.S. real estate owned by nonresidents.

What FIRPTA Does

Under FIRPTA, the buyer of a U.S. property must withhold 15% of the gross sale price (not the gain) when purchasing from a foreign seller. That amount is remitted to the IRS to cover potential capital gains tax liability.

For example, if you sell your Arizona home for $500,000, the buyer must withhold $75,000 and send it to the IRS. The actual tax owed may be less, but you won’t see that refund until you file a U.S. nonresident income tax return (Form 1040-NR) the following year.

How to Reduce or Avoid Excessive Withholding

If your actual gain is small or you expect to owe less than 15% tax, you can apply for a FIRPTA withholding certificate (Form 8288-B) before the sale closes. This process allows the IRS to authorize a reduced withholding rate that better reflects your true tax liability. However, timing is critical—the application must be submitted before closing, and the IRS can take several weeks to respond.

State-Level Withholding

Some states also impose their own nonresident withholding requirements. California, for example, generally withholds 3.33% of the sale price from nonresident sellers, while others, like Florida, have no state income tax. A well-timed tax plan can ensure that both federal and state withholdings are credited properly and that refunds flow efficiently.

3. Calculating Capital Gains on the Sale

When you sell your U.S. home, capital gains are calculated based on the difference between the adjusted cost basis (purchase price plus improvements and certain expenses) and the sale proceeds.

Primary Residence vs. Rental Property

If you previously used your U.S. home as a primary residence, you may be eligible for a Section 121 exclusion—up to $250,000 USD ($500,000 for married couples) of capital gain can be excluded from U.S. tax if you owned and lived in the home for at least two of the past five years.

However, if the property has been rented out for a period, a portion of the gain may be depreciation recapture, taxed at a higher rate of up to 25%. Depreciation recapture represents the reversal of prior deductions claimed on rental income.

Canadian Capital Gains Implications

Canada taxes residents on their worldwide income, including gains from the sale of foreign real estate. When you move back to Canada, the CRA will consider the fair market value of your U.S. home on the date you reestablish Canadian residency as its new cost base.

This means that if you keep the property after returning and sell it later, only the appreciation after your return to Canada will be taxable in Canada. The portion of gain accrued while you were a U.S. resident typically falls outside Canada’s taxing jurisdiction.

You can claim a foreign tax credit on your Canadian return for U.S. taxes paid on the same gain, ensuring that income isn’t double-taxed.

4. Renting Out Your U.S. Property: Income, Withholding, and Reporting

For snowbirds who choose to rent their property instead of selling, the tax implications are more complex but manageable with the right structure.

Nonresident Withholding on Rental Income

Under U.S. law, rental payments to nonresident owners are subject to a 30% withholding tax on the gross rent. However, Canadians can elect to file under Section 871(d) and treat the rental activity as “effectively connected income” (ECI).

This election allows you to file a U.S. nonresident tax return (Form 1040-NR) and deduct expenses such as mortgage interest, property taxes, insurance, repairs, and depreciation—reducing or even eliminating taxable income.

Without this election, you’d pay 30% tax on the gross rent with no deductions—a costly mistake that can easily be avoided with proactive cross-border tax filing.

Filing Requirements

Each year, a Canadian rental owner must:

• File Form 1040-NR to report rental income and expenses.
• File Form 8840 (Closer Connection Exception) or Form 8833 (Treaty Disclosure) to document tax residency and treaty positions.
• Issue Form W-8ECI or W-8BEN to the property manager or tenant to ensure the correct withholding treatment.

At the state level, you may also have to file a nonresident state income tax return (e.g., California Form 540NR or Arizona Form 140NR).

Canadian Reporting Obligations

On your Canadian tax return, you must report worldwide income, including U.S. rental profits. You can claim a foreign tax credit for U.S. federal and state taxes paid on that income to prevent double taxation.

However, differences in depreciation rules between the two countries can lead to temporary mismatches in reported income—something your cross-border accountant must reconcile annually.

5. Depreciation and Recapture: Hidden Costs of Holding a Rental

Depreciation (known as “capital cost allowance” in Canada) is a valuable deduction when you rent out your U.S. home. But it comes with a catch.

U.S. Depreciation Rules

In the U.S., residential real estate is depreciated over 27.5 years using the straight-line method. Each year, a portion of your property’s value (excluding land) can be deducted from rental income to reduce taxable profit.

When you eventually sell, however, the IRS requires you to recapture that depreciation—adding it back to taxable income at a rate up to 25%.

This can create a significant tax bill if the property has been held for many years as a rental.

Canadian Perspective

The CRA also allows depreciation (CCA) but only up to the point where the undepreciated capital cost equals the property’s adjusted cost base. If you claim CCA and later sell the property for more than its depreciated value, the recapture is taxable as regular income, not a capital gain.

Strategic Takeaway

For many snowbirds, claiming full depreciation each year may not be optimal, especially if the plan is to sell within a few years. A cross-border tax professional can model whether it’s more efficient to defer or limit depreciation deductions to minimize recapture taxes later.

6. Withholding Tax on Rental Income: The NR6 Election

Canadians who rent out U.S. property can file an NR6 form with the CRA to avoid withholding 25% of gross rent (the default rule). This allows tax to be paid only on the net rental income after expenses.

However, the NR6 form must be filed before the first rent payment of each year, and a Canadian return (T776) must be filed to reconcile the income. Missing this step can trigger substantial penalties and over-withholding.

In combination with the U.S. Section 871(d) election, this structure ensures that both tax authorities assess income on a net basis, reducing double taxation and improving cash flow.

7. How the Canada-U.S. Tax Treaty Protects Snowbirds

The Canada–U.S. Tax Convention plays a crucial role in preventing double taxation and clarifying which country has primary taxing rights.

Key Treaty Provisions

• Article VI gives the U.S. primary taxing rights over income from U.S. real property, but Canada can also tax the same income with a foreign tax credit to eliminate double taxation.
• Article XIII allows both countries to tax capital gains from real property, with credits available for tax paid to the other.
• Article XXIV provides the mechanism for eliminating double taxation through credits and exemptions.

The treaty also defines tax residency, which determines where you must file as a primary resident. If you split time between both countries, the treaty’s “tie-breaker rules” (center of vital interests, habitual abode, citizenship) determine your residency for tax purposes.

Importance of Filing Treaty Elections

Failure to properly disclose treaty elections or residency tie-breaker positions (on Form 8833, for instance) can result in penalties or denial of treaty benefits. Professional cross-border tax guidance ensures these positions are clearly documented and compliant.

8. Estate Planning Implications for U.S. Property Owners Returning to Canada

Estate planning is another dimension of the rent-or-sell decision. U.S. real estate held by Canadians remains subject to U.S. estate tax exposure—even after returning to Canada.

U.S. Estate Tax Exposure

The U.S. estate tax applies to the fair market value of U.S.-situs assets (including real estate, stocks of U.S. corporations, and certain trusts) owned at death.

While U.S. citizens and domiciliaries have a generous exemption ($13.61 million USD in 2024), Canadian residents who are not U.S. citizens only receive a pro-rated exemption based on the ratio of their U.S. assets to worldwide assets.

This means a Canadian with a modest global estate could still face U.S. estate tax if their U.S. property is valuable relative to total worldwide assets.

Using Ownership Structures to Mitigate Risk

Common strategies include:

• Holding property through a Canadian corporation or trust (though this can trigger other tax complexities).
• Using joint ownership structures between spouses.
• Purchasing life insurance to cover potential U.S. estate tax liabilities.
• Selling before death to simplify estate administration and avoid probate complications in both countries.

For snowbirds moving home, revisiting their estate plan is crucial—especially if the property remains in the U.S. while heirs reside in Canada.

9. Coordinating Financial Planning Across Borders

Deciding whether to rent or sell your U.S. home isn’t purely about taxes—it’s about aligning your assets with your long-term financial and lifestyle goals.

Key Questions to Consider

1. Cash Flow Needs: Will rental income meaningfully contribute to your retirement income plan, or would a lump-sum sale reinvested in Canada generate more predictable returns?
2. Currency Exposure: Keeping a U.S. property means continued exposure to USD/CAD exchange rate fluctuations. Selling allows you to repatriate funds at a chosen rate or hedge through investment products.
3. Maintenance and Management: Are you prepared to handle the logistics of managing a U.S. rental property from Canada, including property managers, insurance, and tax filings?
4. Future Residency Plans: If you expect to spend future winters in the U.S., retaining the property might preserve flexibility.

Role of Cross-Border Advisors

A coordinated team—typically including a cross-border tax accountant, financial planner, and estate attorney—can model both scenarios and project long-term after-tax outcomes. They can help determine whether the sale proceeds, once taxed and converted, will outperform projected rental income net of expenses, depreciation, and cross-border filing costs.

10. Case Study: A Practical Example

Let’s consider a fictional example:

Linda and Robert, dual citizens who lived in California for 10 years, own a vacation home in Palm Springs. Purchased for $400,000 USD in 2012, it’s now worth $700,000 USD. They are moving back to British Columbia permanently and debating whether to rent or sell.

If They Sell:

• U.S. capital gain: $300,000 USD, minus improvements.
• FIRPTA withholding: 15% of $700,000 ($105,000) at closing, refundable based on actual tax.
• Federal capital gains tax: About $45,000 USD after exclusions and credits.
• California tax: Approximately $12,000 USD.
• Canadian implications: None if sold before becoming residents again; if sold after return, a foreign tax credit offsets most U.S. tax.
• Net proceeds: Roughly $640,000 USD, which can be invested in CAD assets.

If They Rent:

• Annual rental income: $42,000 USD.
• Expenses (taxes, insurance, maintenance, management): $15,000 USD.
• Depreciation deduction: $9,000 USD/year.
• Taxable U.S. income: $18,000 USD taxed at ~22%.
• Canadian reporting: Net income after foreign tax credit.
• Future sale: Higher eventual capital gains exposure plus depreciation recapture at 25%.

Result: Renting produces stable income but adds complexity and eventual recapture tax. Selling provides liquidity, simplifies estate exposure, and removes future filing obligations. The right decision depends on longevity, cash flow goals, and estate planning priorities.

11. Practical Steps for Snowbirds Planning the Transition

To ensure a smooth process, snowbirds should follow a deliberate checklist when returning to Canada:

1. Consult a cross-border tax professional before listing or renting the property.
2. Determine your residency date for Canadian tax purposes—this affects cost basis resets and reporting.
3. File FIRPTA forms (8288, 8288-A, 8288-B) early if planning to sell.
4. File Form 1040-NR and Form 8833 annually if renting.
5. Evaluate state-level obligations—especially in California or Arizona.
6. Coordinate currency conversion and repatriation with your financial planner.
7. Review estate plans to ensure wills and powers of attorney align with both jurisdictions.
8. Document all improvements to maximize cost basis and reduce taxable gain.
9. Engage property management for rentals to ensure compliance with local landlord laws.

Cross-border compliance is detail-heavy, and small mistakes can cause large delays in tax refunds or trigger audit inquiries. Proactive filing and dual-country coordination are the best defenses.

12. Conclusion: Integrating Tax, Lifestyle, and Legacy

Selling vs. renting your U.S. home as a returning snowbird is more than a financial decision—it’s a cross-border strategy that intersects with lifestyle, estate, and long-term financial planning.

A sale simplifies your portfolio and may free capital for retirement investments in Canada, but it triggers immediate capital gains and FIRPTA withholding. Renting offers ongoing U.S.-dollar income and potential appreciation but demands ongoing compliance and introduces future recapture and estate tax risks.

Ultimately, the right choice depends on your personal goals, health, liquidity needs, and comfort with cross-border complexity. By engaging a coordinated team of cross-border advisors, you can transform what might seem like a tax burden into an opportunity—ensuring that your U.S. property decisions fit seamlessly into your broader wealth and estate plan.