Hi
Rental property acquired in 2003 in Canada. Used as primary residence until turned into a rental in 2004. I became a US resident in 2010.
My understanding is I must use FMV on day it became a rental (NOT day I became a resident of USA) to establish cost basis for depreciation and capital gains in the USA (such a bad deal!!!). What about depreciation recapture? Obviously I did not file US tax returns for years 2004-2009, so did not depreciate. I only started depreciation in 2010. Upon sale, are they going to force an implied depreciation for the 2004-2009 time period?
Thanks
Depreciation Recapture of Canadian Rental Property
Moderator: Mark T Serbinski CA CPA
This is an example where it would have been wise for you to have elected to deem dispose of your property when you left in 2010. Then it would be allowed to have the 2010 value as its US cost basis, under the new treaty provison.
But, since you did not do this, you are taxable in US as you state.
I will lokk into whetehr you are forced to recapture depreciation that you never took, but on first glance I'm afraid you might.
Fotunately you will have ample Cdn tax. Unfortuantely your US calculated capgains will be HUGE becauae of the currency change between 2004 and 2012.
But, since you did not do this, you are taxable in US as you state.
I will lokk into whetehr you are forced to recapture depreciation that you never took, but on first glance I'm afraid you might.
Fotunately you will have ample Cdn tax. Unfortuantely your US calculated capgains will be HUGE becauae of the currency change between 2004 and 2012.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Hindsight is 20/20. If i had elected to do a deemed disposition, I would have also had a cashflow problem at that time.
Please let me know what you find out about the recapture. I have not been successful in finding an answer yet.
The capitals gains really are huge because of the currency difference. The problem is, even though I have ample canadian tax credit (more than the USA tax obligation), form 1116 is only allowing me to use part of it because of the capital gains adjustments.
One more question: when is the canadian tax considered to be accrued and paid? I would consider the closing date the accrued date, and the date that CRA provides the compliance certificate the 'paid' date. Does this make sense?
Please let me know what you find out about the recapture. I have not been successful in finding an answer yet.
The capitals gains really are huge because of the currency difference. The problem is, even though I have ample canadian tax credit (more than the USA tax obligation), form 1116 is only allowing me to use part of it because of the capital gains adjustments.
One more question: when is the canadian tax considered to be accrued and paid? I would consider the closing date the accrued date, and the date that CRA provides the compliance certificate the 'paid' date. Does this make sense?
According to the IRS, pub 946:
"You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater.
Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Depreciation allowable is depreciation you are entitled to deduct. "
AND
"To claim depreciation on property, you must use it in your business or income-producing activity. If you use property to produce income (investment use), the income must be taxable. You cannot depreciate property that you use solely for personal activities. "
I'm hoping that since my rental income was not subject to US taxation during the years I was a non-resident, that depreciation allowable (and allowed) for those years was 0.
"You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater.
Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Depreciation allowable is depreciation you are entitled to deduct. "
AND
"To claim depreciation on property, you must use it in your business or income-producing activity. If you use property to produce income (investment use), the income must be taxable. You cannot depreciate property that you use solely for personal activities. "
I'm hoping that since my rental income was not subject to US taxation during the years I was a non-resident, that depreciation allowable (and allowed) for those years was 0.
That is not typically how IRS works. After all, you are having to report and pay tax on the gains you made before entry into US, so why would depreciation be any different. IRS doesn't have a good handle on 'new' taxpayers, unlike canada.
If the US tax on this sale is really more than your cdn tax credit will cover, you may have to think about going back to 2010 and electing on your departure return to deem dispo your former home. But my guess is that it is (a) too late, or (b) will cost you some penalty.
If the US tax on this sale is really more than your cdn tax credit will cover, you may have to think about going back to 2010 and electing on your departure return to deem dispo your former home. But my guess is that it is (a) too late, or (b) will cost you some penalty.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Thanks nelsona. I will contact both the IRS and CRA on Monday to see what they have to say, and will post their responses. I doubt I will get a proper answer from the IRS - I typically get someone who's only response is to read off the forms. The only good news is that since the property is out of the USA, I was using 40 year SL depreciation, so the recapture is not as big as it could be.
As for CRA, the interest is 5%, unsure if they will charge penalties, or even allow it. Unfortunately, I just spent a lot on capital improvements, after departing, so I would only get half the tax benefit on those since they would be against capital gains tax basis rather than canadian recapture.
Its too bad that Form 1116 credits at the average rate, while the income is at the marginal rate.
What even adds more uncertainty to the mix is that cap gains are set to go up next year, medicare tax applies, and AMT goes up, unless new law is passed. I may be better off just to sell this year and eat the tax.
As for CRA, the interest is 5%, unsure if they will charge penalties, or even allow it. Unfortunately, I just spent a lot on capital improvements, after departing, so I would only get half the tax benefit on those since they would be against capital gains tax basis rather than canadian recapture.
Its too bad that Form 1116 credits at the average rate, while the income is at the marginal rate.
What even adds more uncertainty to the mix is that cap gains are set to go up next year, medicare tax applies, and AMT goes up, unless new law is passed. I may be better off just to sell this year and eat the tax.
According to an email I received from the IRS: the rental property is Section 1250 property, and you only must recapture any 'additional depreciation' beyond straight line depreciation on the asset. Therefore, there is no recapture requirement for the time period I was not subject to US taxes. They referred me to Pub 544 for the explanation.
According to a CRA phone call: It is possible to do an adjustment for deemed disposition for a previous tax year. They recommend doing so under the Voluntary Disclosure program to avoid penalties. However, I still have to pay interest.
According to a CRA phone call: It is possible to do an adjustment for deemed disposition for a previous tax year. They recommend doing so under the Voluntary Disclosure program to avoid penalties. However, I still have to pay interest.
I think you are misunderstanding. You must ALWAYS recapture the regular depreciation. The reference to a 1250 property refers to the ability to depreciate more than the re gular amoiunt.
If you did not over depreciate, then you don't have to repcapture the additional amount, but you still have to recapture the ordinary depreciation, which includes, as you know, the amount you "should have" depreciated in the past but did not,
If you did not over depreciate, then you don't have to repcapture the additional amount, but you still have to recapture the ordinary depreciation, which includes, as you know, the amount you "should have" depreciated in the past but did not,
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Nelsona, I have the same understanding you do, which is why I am surprised by their response.
This is the IRS response:
"I am assuming that this was residential rental property and that there was a gain on the sale. As a general rule, there is no recapture for residential rental property unless that property is qualified property for which you claimed a special depreciation allowance. I will provide some information from Publication 544 which may be helpful.
Residential rental property is considered to be section 1250 property. Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method. If you used the straight line method of depreciation, there would be no additional depreciation. Thus, there would be no recapture. Please refer to Publication 544 for more information about additional depreciation."
Are they wrong?
This is the IRS response:
"I am assuming that this was residential rental property and that there was a gain on the sale. As a general rule, there is no recapture for residential rental property unless that property is qualified property for which you claimed a special depreciation allowance. I will provide some information from Publication 544 which may be helpful.
Residential rental property is considered to be section 1250 property. Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method. If you used the straight line method of depreciation, there would be no additional depreciation. Thus, there would be no recapture. Please refer to Publication 544 for more information about additional depreciation."
Are they wrong?
This is talking about the additioanl depreciation only. Regular depreciation ios always recaptured.
http://www.frascona.com/resource/pal801taxcons.htm
http://www.frascona.com/resource/pal801taxcons.htm
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Makes sense. I think I am going to file the adjustment for deemed disposition and eat the interest. I also think the CRA agent was slightly wrong. Elections aren't valid for voluntary disclosure. Since it is an election to treat real property as a deemed disposition, I'm out of luck on not paying the penalty too.