Dual Citizen Canadian Resident Sold Property in US

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beaconhill
Posts: 30
Joined: Sat Oct 25, 2014 10:42 am

Dual Citizen Canadian Resident Sold Property in US

Post by beaconhill »

I'm a US citizen who moved to Canada when 3 years old. I was not aware until recently of the need to file US tax returns, and now I want to become compliant. I have always filed and paid taxes in Canada. I am largely self-employed, with the majority of my income from rental income (two properties in Canada, and one in the US).

In the past several years, I have spent an average of a few months of the year in the US, and in the past three years I have purchased three properties in the US, and sold two of them. The property I kept earns rental income. Tax was withheld on the sale, which I believe I can recoup once I file, so that is another incentive to become compliant.

In my initial reading regarding becoming compliant, I believed it was very unlikely I would owe any US taxes because my income is relatively small ($20-50K/year) and I have always paid taxes in Canada. But now that I've started preparing my returns, and learning there are so many differences between Canada and US tax law, it looks like I'll have a fairly substantial (for me) US tax bill for 2013. This is mostly due to the fact that I sold one US property after owning it for less than one year. In Canada, it was considered a capital gain, but I don't think that will be the case in the US. It also seems that, because of the type of income I have, I will be limited in being able to offset Canadian taxes I have paid.

Something does not seem right to me that someone of modest income who pays taxes in Canada would owe US taxes, so I hope I'm missing something or misunderstanding something about filing in the US. Any advice would be greatly appreciated.

Thank you in advance!
nelsona
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Post by nelsona »

The short tem sale in US is capital gain, it is just short-term capital gain. You will owe in US because US gets the money first. It is Canada that would credit you for this income.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
beaconhill
Posts: 30
Joined: Sat Oct 25, 2014 10:42 am

Post by beaconhill »

Thanks very much. I've already filed and paid my Canadian taxes. In future years, I will do my Canadian and US returns at the same time. Once I've filed and paid my 2013 US taxes, will it be possible to amend my 2013 Canadian return and seek a credit for the taxes I paid in the US? Thanks very much again.
nelsona
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Post by nelsona »

Yes.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
beaconhill
Posts: 30
Joined: Sat Oct 25, 2014 10:42 am

Post by beaconhill »

Thanks. I'm having trouble with the search function, so my apologies if my question had previously been answered. I've read a lot of the threads in the past couple days - amazing forum. I'll definitely try to research as much as possible before asking any more questions, as I don't want to clutter things.

Thanks very much again.
beaconhill
Posts: 30
Joined: Sat Oct 25, 2014 10:42 am

Post by beaconhill »

I've done some searching, but having trouble finding an answer that fits my particular situation. Ten years ago my common law partner and I purchased a house on a large lot. We subdivided the lot, sold the existing house, and built a new house on the newly created lot and moved into it with the intention of staying.

Financial circumstances changed and just over a year later, we moved out and rented out our house. As we became renters at that time and have not since owned another principal residence,, I understand that we could consider our rental house as being our principal residence for up to five years. After that time, we got a house appraisal done, because we wanted to know fair market value for the house so that could be considered when calculating PRE for capital gains taxes when we eventually sell the house.

During all this, I never considered I would be filing US tax returns that have very different rules about capital gains and revenue property. In the US, apparently I am supposed to depreciate revenue property (I can't do that in Canada, as I would lose my PRE). Also, I wouldn't even know how to calculate depreciation if I did that on my US return. What would the starting price be: the cost of building the home on the lot we already owned, or the fair market value of the home at the time it turned into a rental property?

Again, any advice greatly appreciated.
victoriaguy
Posts: 54
Joined: Sun Oct 26, 2014 12:03 am
Location: Victoria, BC, Canada

Post by victoriaguy »

Hi beaconhill,

I think you can start to depreciate your property four years after you elect to treat it as not having converted, and that there will be a deemed sale and repurchase at that time for Canadian tax purposes. I'm not aware of such generous provisions in the US, but expect you could depreciate in the US, just not in Canada. Does that sound correct, nelsona?

Actually, I have a similar question to beaconhill. I have property rentals and have sold properties in both Canada and US, both long and short term.

In my case, I am counting myself as a real estate professional who has materially participated in each property, and feel confident to establish that in case the IRS asks. I'm also treating it as my trade/business, as about 90% of my "personal services" are related to rentals, fix-ups, and sales.

The question I have not been able to find an answer to is, whether there are circumstances where the capital gains on these house sales can (or should) be counted as sales of inventory rather than as capital gains. And if so, whether the gains on the sales of this inventory can be counted as "earned" income, on form 2555. (I am aware of the 30% limit on the earned income exclusion where capital is an income producing factor.... thp!).

For both US properties I'm thinking of, the gains are short term, and I collected rent on one of them for only one month before deciding it was too much hassle to keep that property. For the other property, I sold it without collecting rent.

Thanks, anyone, for any enlightenment or directing me where I might find an answer to this.
nelsona
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Post by nelsona »

In US you MUST depreciate every year that you rent it.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
beaconhill
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Joined: Sat Oct 25, 2014 10:42 am

Post by beaconhill »

"I think you can start to depreciate your property four years after you elect to treat it as not having converted, and that there will be a deemed sale and repurchase at that time for Canadian tax purposes. I'm not aware of such generous provisions in the US, but expect you could depreciate in the US, just not in Canada. Does that sound correct, nelsona?"

I hope I understand your post correctly regarding your reference to four years. From what I understand, if one changes their property from a principal residence to a rental property, one can continue to treat their property as a principal residence for one year beyond the year of the status change, and, under certain circumstances, can also elect to add an additional four years beyond that. This, obviously, can represent a big tax savings as principal residences are free from capital gains tax in Canada.

In the US, it seems a home owner can also claim an exemption from capital gains tax from a principal residence, but it is limited to $250,000 for an individual, and the owner must reside in the property for at least two of five years before the sale.

Unfortunately, while I was generally aware of the Canadian tax rules when I changed my residence from a principal residence to a rental property nearly 10 year ago, I did not specifically know that to qualify for the extra four years, I had to file an election to do so with my tax return at the time of the change. (And the professional I hired to file my taxes also did catch this). Apparently, I can ask for permission to late file this election now, but I don't know the likelihood of it being accepted. Of course I'm very much hoping it will, as this will make a big difference to me when I eventually sell my home.
beaconhill
Posts: 30
Joined: Sat Oct 25, 2014 10:42 am

Post by beaconhill »

My situation appears to be getting worse. I've looked through my completed returns to see if my tax professional did happen to file an election to continue principal residence exemption for an additional four years. Not only did I find that did not happen, but I see capital cost allowances were calculated in my return. Is there any chance that I can amend ten years worth of tax returns and take this deduction out? This represents a huge tax implication for me.
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