Selling a Cross-Border Short-Term Rental: The Exit Checklist From Listing to the Last 1042-S

Selling a US short-term rental is a sale of US real property (FIRPTA, recapture, a US return), the end of a business (platform, tax registrations, insurance, an entity if one exists), and a Canadian disposition (a gain in Canadian dollars, a credit, the last T1135). The items fall in a sequence: some before listing, some before closing, some in the months after, and some on the following year's returns. Missing the pre-closing items (the Form 8288-B, the recapture computation) costs cash flow; missing the post-closing items (the platform and tourist tax closures, the final 1042-S) costs penalties and notices.

Key takeaways

• Before listing: compute the US gain by asset class (capital gain, unrecaptured section 1250, section 1245 recapture from any cost segregation); confirm suspended passive losses to be released; get an ITIN or EIN if not already held; confirm the holding structure and what it means at sale.
• Before closing: file Form 8288-B to reduce FIRPTA withholding from 15% of the price to the expected tax; instruct the closing agent on escrow; confirm state withholding rules (California withholds 3.33%; Florida has none).
• At closing: Forms 8288 and 8288-A filed by the buyer; the seller keeps the stamped 8288-A copy.
• After closing: deactivate the platform listings and close the host account after the final payout; obtain the final Form 1042-S (or confirm zero withholding); cancel the Florida transient tax registration and file the final return; cancel landlord insurance; dissolve any LLC and file its final Form 5472 and pro forma 1120; close the US bank account after the last transactions (or keep it and report on the T1135 until closed).
• The following year: 1040-NR (and state return) reporting the sale on Form 4797 and Schedule D with the FIRPTA credit; Canadian T1 reporting the disposition in Canadian dollars with the foreign tax credit and any CCA recapture; final T1135 showing the disposition.

Before listing

The gain by class. Pull the depreciation schedule. Building depreciation is unrecaptured section 1250 gain (25% maximum); any cost segregation components are section 1245 recapture at ordinary rates; the rest is long-term capital gain. Suspended passive losses from prior years (a non-resident's rental losses are suspended) are released on a fully taxable disposition and offset the recapture. This computation drives the 8288-B and the seller's net.

Identification. The 8288-B and the 1040-NR require a US TIN; a seller without an ITIN applies on Form W-7 with the 8288-B (the IRS accepts a W-7 attached to the 8288-B).

The structure. Personal or revocable trust: the seller is the individual. LLC: the LLC is the seller of record but disregarded; the individual reports; the LLC's final year filings follow. Canadian corporation: the corporation files the 1120-F; branch profits tax on the repatriated gain.

Canadian side preview. The ACB in Canadian dollars at the purchase-date rate; the proceeds at the expected sale-date rate; any CCA claimed on the T776 to be recaptured. The Canadian gain can differ from the US gain by the currency movement.

Before closing

Form 8288-B. Filed with the IRS before closing (allow 90 days), with the purchase and sale contracts, the depreciation schedule, and the computation of the expected tax. The IRS issues a withholding certificate; the closing agent holds the 15% in escrow until it arrives, then releases the excess. Without the 8288-B, 15% of the price goes to the IRS and comes back a year later on the 1040-NR.

State. California and a few other states withhold on sales by non-residents; Florida does not. Confirm the state's rule and any state 8288-B equivalent.

The buyer's side. If the buyer will use the property as a residence and the price is under $1 million, the FIRPTA rate is 10%; under $300,000, zero. The buyer's affidavit determines it.

At closing

The buyer (through the closing agent) files Forms 8288 and 8288-A with the withholding within 20 days; the seller receives a stamped Form 8288-A as proof of payment, needed for the 1040-NR credit. The closing statement allocates the price among the assets if the sale includes furniture (section 1245 property).

After closing

Platform. Deactivate listings before the closing date to avoid bookings the new owner cannot honour; process any final payouts; close the host account; download the year's transaction history and the tax documents. The platform issues the final Form 1042-S the following March (or a 1099-K if the host had provided a W-9 through an LLC).

Tourist and sales tax. Cancel the Florida Department of Revenue transient rental registration and the county tourist development tax account, filing final returns for the last period. Platforms that collected on the host's behalf need the closure too.

Insurance. Cancel the landlord and umbrella policies effective closing; obtain any premium refund.

Entity. An LLC used to hold the property is dissolved with the state after the sale; its final Form 5472 and pro forma 1120 are filed for the year; its EIN is closed with the IRS. A Canadian corporation files its 1120-F for the sale year and considers whether to keep the US registration.

Bank account. A US account used for the rental can be closed after the last transactions clear, or kept; either way it is on the T1135 for the year (and on any FBAR if the owner is a US person).

The following year

US. 1040-NR for the sale year: Form 4797 for the recapture and the sale of business property, Schedule D for the capital gain, the released passive losses on Schedule E, the FIRPTA withholding from Form 8288-A as a payment. Due June 15 (no US wages). State non-resident return where applicable.

Canada. T1 with the disposition on Schedule 3 in Canadian dollars; CCA recapture on the T776 if any was claimed; the foreign tax credit on Form T2209 for the US federal and state tax on the gain; T1135 showing the disposition and the gross income for the part-year. If the property was ever the owner's principal residence in a year they were a Canadian resident and ordinarily inhabited it, the principal residence exemption can be designated for those years on Form T2091.

Exchange. Proceeds converted at the sale-date rate; ACB at the purchase-date rate; the difference is the Canadian gain, which for a property bought at par and sold at 1.37 is materially larger than the US gain.

Worked example

A Calgary couple sell a $850,000 Clearwater condo bought in 2016 for $500,000 USD (at 1.30) and rented on Vrbo since 2019, with $70,000 of US depreciation and no Canadian CCA.

• Before listing. Gain by class: $70,000 unrecaptured 1250 at 25%; $350,000 capital gain at 15% or 20%; suspended losses of $12,000 released. Expected US tax about $75,000. ITINs held.
• Before closing. 8288-B filed; certificate received; escrow holds $127,500, releases about $52,000 at closing.
• After closing. Vrbo listing removed; host account closed; Pinellas County tourist tax and Florida DOR registrations cancelled with final returns; landlord policy cancelled; US bank account kept for the 1040-NR refund.
• Following spring. 1040-NR with Form 4797, Schedule D, and the 8288-A credit; small refund. T1: proceeds $1,164,500 CAD less ACB $650,000 CAD: gain $514,500 CAD, half taxable at Alberta rates, about $124,000 of tax less a credit of about $103,000 CAD for the US tax; final T1135.

Official sources

"The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding." — Internal Revenue Service, FIRPTA Withholding, https://www.irs.gov/individuals/international-taxpayers/firpta-withholding

Form 8288-B is used to apply for a withholding certificate to reduce or eliminate FIRPTA withholding on the disposition of a U.S. real property interest. — Internal Revenue Service, About Form 8288-B, https://www.irs.gov/forms-pubs/about-form-8288-b

"The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate." — Internal Revenue Service, Topic No. 409, Capital Gains and Losses, https://www.irs.gov/taxtopics/tc409

"Canadian resident individuals, corporations, and certain trusts that, at any time during the year, own specified foreign property costing more than $100,000" must file Form T1135. — Canada Revenue Agency, Foreign Income Verification Statement, https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/foreign-reporting/foreign-income-verification-statement.html

Practitioner note

The exit is a sequence, and the two items that cost the most when skipped are the Form 8288-B before closing and the Canadian gain computed at the right exchange rates after. The platform closure and the tourist tax cancellation are small but generate notices for years if missed. We work the list from the listing date, and we file the 8288-B the week the contract is signed.

See also: For the full sequence of a Canadian move to Florida, see the Canada-to-Florida tax guide, and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the pre-sale gain computation, the Form 8288-B, the closing and post-closing closures, and the sale-year returns in both countries. See cross-border pricing or book a call.