Hi and thanks in advance for your thoughts.
I'm helping a Canadian that sold a US property in 2016.
Facts are:
Purchased in 1995, rented it for 8 years. Filed 1040NR, claimed depreciation each year. He has record of loss carryforwards.
He stopped renting and it became his winter home. He used it a few months a year until selling it in 2016.
I'm confused how to treat the sale in the US. I obviously want to trigger the loss carryforwards and need to deal with the recapture. Is it considered a sale of a business property even though it hasn't been a business property for a long time? If not, where do the losses come through?
Canadian sale of US property
Moderator: Mark T Serbinski CA CPA
and you don't want to be approaching depreciation recapture the same way you would on a Cdn return, as the US recapture rules apply, and work, quite differently, even though conceptually they are quite similar.
Cd return recapture: A resident of Canada is subject to Canadian income tax on worldwide income, including income and capital gains earned outside Canada. In the year of the sale, the Canadian is required to report any capital gain or loss, as well as any recapture of previously claimed depreciation to the extent proceeds exceed the undepreciated capital cost.
A full proper reply to your question would require a memo a few pages in length. You can message me to see if we can orally discuss it.
Cd return recapture: A resident of Canada is subject to Canadian income tax on worldwide income, including income and capital gains earned outside Canada. In the year of the sale, the Canadian is required to report any capital gain or loss, as well as any recapture of previously claimed depreciation to the extent proceeds exceed the undepreciated capital cost.
A full proper reply to your question would require a memo a few pages in length. You can message me to see if we can orally discuss it.
The depreciation was only taken during the years it was rented. No depreciation taken during personal use period.
I'm comfortable with the Canadian side, including foreign tax credits. I'm just stuck on the US side. I know that I'm dealing with a Sec. 1250 gain but I can't seem to figure out if this is reported as a sale of a business property or not. I'm inclined to report it as business property so that the recapture and loss carryforwards come through "as expected".
Was just hoping maybe somebody had experience with this type of situation.
I'm comfortable with the Canadian side, including foreign tax credits. I'm just stuck on the US side. I know that I'm dealing with a Sec. 1250 gain but I can't seem to figure out if this is reported as a sale of a business property or not. I'm inclined to report it as business property so that the recapture and loss carryforwards come through "as expected".
Was just hoping maybe somebody had experience with this type of situation.
RE:I'm comfortable with the Canadian side, including foreign tax credits. I'm just stuck on the US side.
I realized that and my only intention was to advise you strictly on the US side. In doing so I advised that the US tax treatment differed from the Cdn (and merely then listed the Cdn for context of that contrast comparison, not to highlight Cdn tax). I did so because I saw from your comments that you are going to incorrectly prepare the US return (putting aside how to resolve your reporting issue at hand)
RE: I know that I'm dealing with a Sec. 1250 gain but I can't seem to figure out if this is reported as a sale of a business property or not.
You should have retired the property on the return in the year it went from rent to personal use (Sch E retirement) and re-classed it as a second home/vacation home, which would have prevented the issue you now face. You'll now need an override which isn't technically correct if you decide to file only the current year return versus properly going back and amending the prior year returns and filing amended returns for them.
and BTW, your last comments completely confirm that, even after you rectify your issue- whether via amended returns or not - you're incorrectly preparing the sale-year return but copying a Cdn tax concept onto a US return, where the two countries' laws differ and the returns should be dissimilar in such regard. I suggest obtaining the advice of a sophisticated US tax prof (many will miss the fine point I'm raising, so get a brainy one) cause you're on the wrong track and one that will incorrectly materially increase your tax liability in the US (which then also screws up the Cdn FTC claim) and leaves you exposed on both sides of the border for future tax liability upon IRS and/or CRA assessment.
I realized that and my only intention was to advise you strictly on the US side. In doing so I advised that the US tax treatment differed from the Cdn (and merely then listed the Cdn for context of that contrast comparison, not to highlight Cdn tax). I did so because I saw from your comments that you are going to incorrectly prepare the US return (putting aside how to resolve your reporting issue at hand)
RE: I know that I'm dealing with a Sec. 1250 gain but I can't seem to figure out if this is reported as a sale of a business property or not.
You should have retired the property on the return in the year it went from rent to personal use (Sch E retirement) and re-classed it as a second home/vacation home, which would have prevented the issue you now face. You'll now need an override which isn't technically correct if you decide to file only the current year return versus properly going back and amending the prior year returns and filing amended returns for them.
and BTW, your last comments completely confirm that, even after you rectify your issue- whether via amended returns or not - you're incorrectly preparing the sale-year return but copying a Cdn tax concept onto a US return, where the two countries' laws differ and the returns should be dissimilar in such regard. I suggest obtaining the advice of a sophisticated US tax prof (many will miss the fine point I'm raising, so get a brainy one) cause you're on the wrong track and one that will incorrectly materially increase your tax liability in the US (which then also screws up the Cdn FTC claim) and leaves you exposed on both sides of the border for future tax liability upon IRS and/or CRA assessment.