Selling a Cross-Border STR: The Exit Checklist

Selling a US vacation rental as a Canadian resident triggers filings on both sides of the border, and the sequencing matters. The FIRPTA withholding is the piece most people plan for, but the exit has a longer tail: depreciation recapture (ordinary rates on cost-seg components, up to 25% on the building), Canadian capital gains on the same sale, foreign tax credit timing between the two returns, and an operational wind-down that includes platform delisting, occupancy tax deregistration, and property management termination. This page covers the full exit sequence in the order things need to happen.

What happens at closing on the US side?

The buyer withholds 15% of the gross sale price under IRC 1445(a) and remits it to the IRS within 20 days. On a $700,000 sale, that is $105,000 held back from your proceeds. The withholding is a deposit against your US tax, not the tax itself. If your actual tax is lower (which it usually is on a property held long-term), you get the difference back when you file your 1040-NR for the year of sale.

Two exceptions can reduce or eliminate the withholding at closing. If the buyer will use the property as a residence and the price is $300,000 or less, IRC 1445(b)(5) eliminates withholding entirely. If the buyer will use it as a residence and the price is between $300,001 and $1,000,000, IRC 1445(c)(4) reduces the rate to 10%. The seller cannot control the buyer’s intended use.

The seller’s tool is Form 8288-B, filed before closing. The application shows the IRS the expected gain and estimated tax, and the IRS issues a withholding certificate allowing a reduced amount. The application requires an ITIN (apply early if you do not have one), a calculation of the gain broken down by component (1245 recapture, unrecaptured 1250 gain, capital gain), and a $1,510 user fee. Processing takes approximately 90 days, so file at least 4 months before the expected closing date.

How do I calculate the US tax on the sale?

The gain has up to three layers, each taxed at a different rate. The detailed breakdown is in the cost segregation recapture guide. The summary:

Layer 1: Section 1245 recapture (ordinary rates). Any personal property reclassified by a cost segregation study (appliances, carpet, cabinetry, lighting) where bonus depreciation was claimed. The recapture equals the full depreciation taken, taxed at graduated ordinary rates (10% to 37% on effectively connected income).

Layer 2: Unrecaptured section 1250 gain (25% ceiling). The straight-line depreciation taken on the building component over the holding period. Taxed at a maximum of 25% under IRC 1(h)(1)(E).

Layer 3: Capital gain (long-term rates). Any gain above the recapture layers. Taxed at the regular long-term capital gains rates (0%, 15%, or 20%).

State taxes may apply on top. Florida has no state income tax, but other states where vacation rentals are common (California, Colorado, Hawaii, Arizona) do. Check the state rules for nonresident sellers.

What do I report on the Canadian side?

Canada taxes the same gain, computed in Canadian dollars. The adjusted cost base (ACB) uses the exchange rate at the date of purchase. The proceeds use the exchange rate at the date of sale. If the Canadian dollar weakened between purchase and sale (which it has done over most of the past decade), the currency movement increases the Canadian-dollar gain even if the US-dollar gain is modest.

Capital gains are included in income at the applicable inclusion rate. For gains realized after June 25, 2024, the first $250,000 of capital gains in a year is included at 50%, and amounts above $250,000 are included at 66.67%, per the 2024 Federal Budget amendments. A large gain on a vacation rental sale can push above the $250,000 threshold, especially after the currency conversion.

The foreign tax credit for the US tax paid is claimed on Form T2209. The credit is limited to the Canadian tax on the same income, calculated under subsection 126(1). If the US tax exceeds the Canadian tax on the gain (possible when section 1245 ordinary recapture is large), the excess US tax is not creditable and is lost. This is the credit mismatch that cost segregation can create on sale: the US ordinary recapture at up to 37% exceeds the Canadian capital gains tax at an effective rate of roughly 25-27% (50% inclusion at a 50-54% marginal rate).

How do I time the FTC between the two returns?

The timing mismatch is the most common mistake. The US tax year and the Canadian tax year both end December 31, but the returns have different due dates. The 1040-NR is due June 15 for nonresident aliens (with an extension to October 15). The Canadian T1 is due April 30. If you sell the property in November, the Canadian return is due before the US return, and the US tax has not yet been calculated.

The practical solution: file the Canadian return with an estimated foreign tax credit based on the FIRPTA withholding (which is known), then amend the T1 once the actual US tax is calculated on the 1040-NR. Alternatively, request an extension on the Canadian return (filing late with a reasonable estimate of tax owing does not trigger a late-filing penalty if the tax is paid on time). The T2209 instructions do not require the foreign tax to be “paid” in the technical sense before claiming the credit; the credit is available for tax “paid for the year” to a foreign government, and the FIRPTA withholding is paid at closing.

If the 1040-NR produces a refund (because the FIRPTA withholding exceeded the actual tax), the refund reduces the foreign tax actually paid, and the T2209 credit may need to be adjusted on the Canadian return. This is a common source of error: claiming the full FIRPTA withholding as the foreign tax credit, then receiving a US refund without adjusting the Canadian return.

What is the operational wind-down checklist?

Beyond the tax filings, the exit has operational steps that need to happen in sequence.

Before listing the property for sale:

• Run the 8288-B calculation to decide whether to file for a reduced withholding certificate
• File the 8288-B application at least 4 months before the expected closing date
• Confirm your ITIN is current (expired ITINs delay the 8288-B and the 1040-NR)

After accepting an offer, before closing:

• Block future bookings on all platforms (Airbnb, Vrbo, direct booking sites)
• Notify the property manager of the sale timeline
• Cancel or transfer the occupancy tax registration with the county or municipality (Florida requires this; other states vary)
• Review the property management contract for termination notice requirements (typically 30-60 days)

At closing:

• Confirm the buyer’s agent remits the correct withholding amount (15%, 10%, or the 8288-B certificate amount) to the IRS on Form 8288
• Obtain copies of Form 8288 and Form 8288-A (the IRS sends 8288-A to the seller, but closing agents sometimes fail to file)

After closing, before year-end:

• Collect final platform payout statements for the partial year
• Close the Airbnb/Vrbo host account or remove the listing
• Cancel the umbrella insurance policy
• Close the US bank account used for rental operations (or keep it open until the 1040-NR refund arrives)
• File the final occupancy tax return for the partial period

Tax filing season (following year):

• File the 1040-NR reporting the sale (due June 15, extendable to October 15)
• File the final T1135 if the property was your only foreign property above the $100,000 CAD threshold
• Report the capital gain on the Canadian T1 with Form T2209 for the foreign tax credit
• Reconcile the FIRPTA withholding against the actual US tax and track any refund

What should I do next?

Start with the 8288-B timing. If you are considering selling in the next 6-12 months, the withholding certificate application needs to be filed well before closing, and the gain calculation requires a current depreciation schedule (including any cost segregation allocations). Get the depreciation schedule from your CPA or from the prior year’s 1040-NR, run the three-layer calculation, and compare the estimated tax to 15% of the expected sale price. That comparison tells you whether the 8288-B is worth the $1,510 fee. For the holding structure implications on the sale, read the STR holding structure comparison. For the full operational compliance picture during the hold, read the snowbird Airbnb tax guide.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.