Giving back Capital cost allowance- Rental to self living

[NewCanadian]

Nelsona,
I am in favor of your advise of claiming CCA to make rental income zero on 216 return.

If I claim $ 10,000 CCA, I will save $ 2,220 now. However in future, if I return to Canada to live in the house , I have to return the CCA claimed. That time on 100K income, will I be paying a much higher tax at 44 % rate or $ 4,400 or same what I saved $ 2,220?

Thanks

[nelsona]

First off, I would not be claiming CCA to get down to xero, unless my US tax is also zero. Recall that CCA is limited to 4% per year, but you can take less.

I'll get back to you on CCA recapture.

[NewCanadian]

Nelsona- Thanks

My net rental income is less than $ 10,000 and my house cost plus land transfer tax is higher than $250,000 so yes, I am within 4 % of allowable CCA to make my 216 income to zero.

[nelsona]

But is your net rental income zero for US tax purposes?That is why I said you can limit the CCA.
The method of determining depreciation may differ that how Canada calculates it. Unless you bought while living in US, the basis is likely different, for one thing.

[NewCanadian]

Nelsona,
I am sorry if I was not clear enough in my previous posts. Let me clarify.

1) For 1040 for current year, considering mandatory US 3.64 % depreciation, my net rental income from Canada rental property will be not only be zero but also negative. Therefore it is not an issue.

2) During 2010 due to Canada variable mortgage rate lower than prime and prime rate also being low, my mortgage interest was significantly lower as an expense resulting in my net rental income highest ever for Canada 216 non resident return.

3) Therefore I have opted for claiming CCA using T776 within allowable 4 % depreciation and plan to bring down canadian tax to zero on 216 return. Therefore I donot need to take either credit or deduction for tax paid to Canada on rental income while I complete 1040.

With mortgage interest rates on the rise, next year will be like any other year.

By the way, I bought my Canadian property while in Canada but your comment made me curious how would be different if I were to buy another Canada property now.

[nelsona]

See why taking CCA is so valuable?

You basis for depreciation is different for CRA and IRS, since you only became taxable in US this year. So the previous amounts of depreciation, although nevr taken in US, will affect basis for your US calculation.

[JGCA]

Since on the Canadian tax return you can elect to take some or no CCA unlike the US side and you are worried about recapture at a higher rate when you dispose of teh property, then you can pay the 22% tax on the Canadian tax return and claim this tax as a credit on your 1040 this way you are sheilding CCA from recapyure at a higher rate when you have to dispose of the property

[nelsona]

The problem is that unless you have foreign net rental income, the 22% tax you pay on the Cdn version of net is of no use in US, the best it can be used for is a deduction at that point, which will be very litle return.

Besides, since he is non-resident, if he sells before returning to canada, the US depreciation would need to be recaptured anyways, and failure to have used CCA will result in insufficient Cdn tax to write off the US tax.


No, the best is to use CCA, to get net zero in canada as well.

[nelsona]

anotherpoint: the recapture would be at cap gains rates, so would unlikey be at higher than 22%: 44% marginal tax bracket.