If you are a Canadian who owns US rental property through an LLC, you are not facing one withholding rule. You are facing two, in sequence. While the property is rented, the IRS treats every rent check as foreign-source-effectively-connected income subject to a 30% gross withholding under IRC §1441. When you sell, FIRPTA imposes a separate 15% holdback on the gross sale price. Most online guides cover only the sale leg. The rental leg is where Canadian owners most often overpay, because §871(d) net basis election is rarely explained in plain language.
30-second triage: which stage are you in?
Before reading further, identify your current stage. The rules are different.
| Stage | What is happening | Default US withholding | Election available |
|---|---|---|---|
| Rental, year by year | Tenants pay rent into the LLC | 30% gross under IRC §1441 | §871(d) net basis election |
| Sale, closing day | Buyer wires purchase price | 15% FIRPTA holdback under IRC §1445 | Form 8288-B certificate |
| Both, same year | Property sold mid-year | Both apply on different dollars | Both elections may be in play |
The two stages are governed by different Internal Revenue Code sections. Confusing them is the most common mistake. A §871(d) election does not reduce FIRPTA on sale. A Form 8288-B certificate does not reduce §1441 on rental income. Each rule has its own form, its own deadline, and its own paper trail.
Stage 1: Rental withholding at 30% gross
The IRS default treatment of rental income paid to a non-resident foreign owner, even one operating through a single-member LLC, is 30% gross withholding. Gross means before deducting property tax, insurance, mortgage interest, repairs, depreciation, or management fees. A property earning $40,000 in rent that nets $5,000 after expenses still triggers $12,000 of US withholding under the default rule. The withholding is collected by whoever pays the rent, typically the property manager, and remitted to the IRS quarterly.
For a Canadian owner, this default is almost always worse than filing a US return on net basis. The fix is the §871(d) election.
§871(d) net basis election
Under IRC §871(d), a non-resident foreign individual can elect to treat US real property income as effectively connected with a US trade or business. The consequences:
- Income is reported on Form 1040-NR, Schedule E
- Deductions for property tax, insurance, mortgage interest, repairs, depreciation, and management fees are allowed
- Tax is computed on net rental income at graduated rates
- Withholding is reduced or eliminated when the property manager has a Form W-8ECI on file showing the election
The election is filed by attaching a statement to your first Form 1040-NR claiming §871(d) treatment. Once made, it applies to all your US real property and remains in force until revoked with IRS consent. Most cross-border CPAs make this election in year one for every Canadian owner with rental property, because net basis taxation is almost always lower than 30% gross.
There is one trap. The election creates a US tax filing obligation for every year you own the property, whether or not the property generates net taxable income. A loss year still requires Form 1040-NR. Failing to file can revoke the election and pull you back into 30% gross withholding retroactively.
SMLLC, MMLLC, or Corp election? FIRPTA matrix
Your LLC's tax classification affects who applies FIRPTA and how.
| LLC structure | US classification | FIRPTA applies to | Practical effect |
|---|---|---|---|
| Single-member LLC, no Form 8832 | Disregarded entity | The Canadian member directly | Buyer withholds 15% from member as if no LLC existed |
| Multi-member LLC, no Form 8832 | Partnership | The partnership, then allocated to foreign partners under §1446(f) | Mixed regime: §1446(f) on transfer of partnership interest, FIRPTA on direct property sale |
| LLC with Form 8832 corp election | C corporation | The corporation itself when it sells | 21% corporate gain tax, then 30% (or treaty-reduced 5%/15%) on dividend distribution |
| LLC owned by Canadian holdco | Same as above | Plus the holdco layer | Two-level taxation but treaty rate often available on dividend leg |
For most Canadian individuals owning a single rental property, the SMLLC disregarded path is simplest. FIRPTA applies as if you owned the property directly, which it effectively means under IRS look-through. The LLC adds liability protection, not a different tax outcome.
Stage 2: FIRPTA on sale at 15% holdback
When the property sells, the buyer is required by IRC §1445 to withhold 15% of the gross sale price and remit it to the IRS within 20 days of closing. Gross price means before deducting mortgage payoff, closing costs, agent commissions, or your basis. A property selling for $500,000 with a $400,000 mortgage triggers a $75,000 FIRPTA holdback against $100,000 of net cash to the seller.
The holdback is not the final tax. It is a prepayment, applied against your actual capital gains tax when you file Form 1040-NR for the sale year. If your actual gain is small, or you have a loss, you reclaim the excess on the return. The reclaim takes 6 to 12 months after filing.
Form 8288-B Withholding Certificate
If the 15% holdback exceeds your maximum tax liability, you can apply for a Withholding Certificate under Form 8288-B. The certificate, issued by the IRS, allows the buyer to withhold less or nothing at all.
Common scenarios for a successful 8288-B:
- Sale at a loss (no gain to tax)
- Long-term hold with significant depreciation recapture only
- §1031 like-kind exchange where gain is deferred
- Primary residence under $300,000 sold to a buyer who will use it as a residence (statutory exemption, no certificate needed)
- Sale priced $300,000 to $1,000,000 to a buyer who will use it as a residence (10% rate, no certificate needed)
Application timing matters. Form 8288-B must be filed before the closing date, with all supporting documents including basis calculation, depreciation schedule, and proof of holding period. The IRS aims to process within 90 days, often longer in practice. If you file late, the buyer must withhold the full 15% at closing and you wait for the post-filing refund.
For Canadian owners selling at a small gain or a loss, the 8288-B is almost always worth filing. The cash freed at closing is meaningful when the buyer's wire is your retirement income.
CRA side: Section 216 election and Article XIII
Canadian residents reporting US rental income face a parallel problem on the CRA side. Default CRA treatment of foreign rental income is gross income, with no expense deductions, taxed at the non-resident graduated rate of 25% under Part XIII. The fix is Section 216.
Section 216 of the Income Tax Act allows a Canadian to elect net basis taxation on Canadian-situated foreign-owned rental property when foreign tax has been paid. The CRA equivalent of the US §871(d) election. File Section 216 by submitting a separate non-resident return on Form NR6 (for ongoing rentals) or as a Section 216 election return.
The combination Canadian residents typically use:
- §871(d) election in the US, file Form 1040-NR Schedule E with deductions
- Section 216 election in Canada, file separate non-resident return on net basis
- T2209 (Federal Foreign Tax Credit) on the Canadian T1 to claim US tax paid against Canadian tax on the same rental income
The two elections work together. They reduce gross withholding on both sides while preserving the FTC mechanism for the underlying tax.
For the sale leg, FIRPTA-withheld tax flows through the same FTC route on T2209. Article XIII of the Canada-US tax treaty assigns primary taxing rights on real property gains to the country where the property is located, so the US gets first crack. Canada then provides the FTC.
Timeline mismatch and FTC trapping
Here is where Canadian owners get burned. The US tax year on rental income often does not match the Canadian tax year, especially mid-year sales. A property sold in February 2026:
- US: Form 1040-NR for tax year 2026, filed by June 15, 2027 (with extension), capital gains tax due by April 15, 2027
- CRA: T1 for tax year 2026, filed by April 30, 2027, FTC computed on T2209
If the US tax is finalized after the Canadian filing deadline, you may need to amend the Canadian return on Form T1-ADJ to claim the FTC. If you wait too long, FTC carryforward rules apply (10 years for non-business income tax FTC for individuals).
For the rental leg, most Canadian CPAs recommend filing US and Canadian returns in parallel each year, claiming FTC each year, to avoid timing drift.
Worked example: Toronto resident sells US rental
Concrete numbers help.
Assumptions:
- Toronto resident, marginal rate 47%
- Property bought 2018 for $300,000, sold 2026 for $500,000
- Total depreciation over 8 years: $80,000
- Form 8288-B was filed 4 months before closing, certificate issued
At closing:
| Item | Amount |
|---|---|
| Sale price | $500,000 |
| Default FIRPTA holdback (15%) | $75,000 |
| With 8288-B certificate (limited to maximum tax) | $40,000 |
| Cash freed by certificate | $35,000 |
On Form 1040-NR for sale year:
| Item | Amount |
|---|---|
| Sale price | $500,000 |
| Less: adjusted basis ($300,000 − $80,000 depreciation) | $220,000 |
| Capital gain | $280,000 |
| Federal capital gains tax (15% long-term) | $42,000 |
| Net (refund or owed) vs FIRPTA prepayment | -$2,000 owed |
On Canadian T1:
| Item | Amount (CAD at 1.35) |
|---|---|
| Capital gain reported in Canada (50% inclusion) | $189,000 (CAD 50% × $280,000 USD × 1.35) |
| Marginal Canadian tax (47%) | $88,830 |
| FTC from US tax paid ($42,000 × 1.35) | $56,700 |
| Net Canadian tax | $32,130 |
| Combined US + CAD tax burden | $88,830 (in line with Canadian rate) |
Frequently asked questions
Does FIRPTA apply if I own the rental through a single-member LLC instead of in my name? Yes. The IRS looks through a single-member LLC to the underlying member. If the member is a non-resident foreign person, FIRPTA applies as if the member owned the property directly. The LLC structure provides liability protection but does not change the FIRPTA outcome.
Can I avoid FIRPTA by selling to another Canadian? No. FIRPTA depends on the seller's status, not the buyer's. A Canadian-to-Canadian sale of US real estate still triggers buyer withholding under §1445. The buyer is liable to the IRS regardless of the buyer's own residency.
Do I have to file Form 1040-NR every year I own the rental property? If you have made the §871(d) election, yes. The election creates a continuous US filing obligation regardless of whether you have net taxable income. A loss year still requires the return. Failing to file can revoke the election and apply 30% gross withholding retroactively.