Hello,
I am sure you've answered these type of questions many times..... My apologies...
My wife and I are in the USA on TN and TD visas. I moved in June 2011 while she moved in Sept 2011. My questions are:
1) How do I file income taxes? We both worked in Canada before moving to USA. I think I first need to file US taxes first on world income, and take the income tax that I paid to Canada as credits on my USA return. Then using the 1040, I'll file my Canadian exit return (non-resident).
My impression is that even though I can do a dual-status return, it will end up costing more taxes as I cannot take "married filed jointly" and standard deductions. Therefore, full year resident option with standard deductions is the way to go.
2) How is my principal residence in Canada taxed when I sell? To illustrate, for example, I purchased my home in Canada for 100K and used it as a principal residence until the day we left. At the departure date, the home appreciated to 130K and we converted it to a rental. 5 years later, we sell it for 180K.
I think for Canada, it is pretty clear. The first 30K gain is tax free while the next 50K capital gain when the home is rented out is taxable. What about in the US (assuming we don't meet the 2 year out of 5 year use test rule)?
many thanks.
In USA on TN Visa - Income tax and Principal Residence
Moderator: Mark T Serbinski CA CPA
1. In the first year, you have 2, or in your case, 3 choices. 1040 MFJ as you say, 1040NR/1040 dual status filing separately, or, if you did not meet SPT for the year, just 1040NR. Try all 3 and see which yields alowest US tax for both of you. None of these affects your cdn departure return.
2. Actually, how you describe Cdn taxaation of what was your principal residence is only one methos, usually not the best. CRA gives you one extra year of principal residnce when you have 'mixed' use. So, if you sell within a year of leaving , no Cdn tax at all. In your sceanrio (assuming you owmned it for 3 years, you didn't say), if you sell in 5 years, at the price you state, you get (3+1)/8 of the entire gain tax free. So if it nets 80K, you pay tax on 40K.
I'll gret back to you on US taxation after the 3 year mark, too busy today.
2. Actually, how you describe Cdn taxaation of what was your principal residence is only one methos, usually not the best. CRA gives you one extra year of principal residnce when you have 'mixed' use. So, if you sell within a year of leaving , no Cdn tax at all. In your sceanrio (assuming you owmned it for 3 years, you didn't say), if you sell in 5 years, at the price you state, you get (3+1)/8 of the entire gain tax free. So if it nets 80K, you pay tax on 40K.
I'll gret back to you on US taxation after the 3 year mark, too busy today.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Thank you for your help.
1) You mentioned trying 3 different ways. I agree with that to figure out which one will yield the lowest US federal taxes. However, my concern is that say I reduce my US tax from 5K to 3K, then this will lower the foreign tax credits on my Canadian return. Overall, I may still pay more taxes (to both US and Canada). Therefore, how can the amount of US tax not affect my Canadian return? I am afraid that I'll have to do all 3 ways for US federal, and I don't know how many ways for California state and then Canada to figure out which combination is best...
2) I agree with your calculation of gain on principal residence. Do I have to plan to sell it within a certain time period so to avoid US capital gain tax? My understanding is that if I meet the 2 year in 5 year use test in the US, we can each exclude 500K from capital gains (or something like that). i.e. if I hold on to my property for say 7 years after we left, then there is no way to meet the use test?
3) How does one calculate the "income" from a rental property in the US? In canada, I suppose it is just gross income minus all expenses. But I read that in US, the residence has to be depreciated according to some schedule?!
Many thanks again!
1) You mentioned trying 3 different ways. I agree with that to figure out which one will yield the lowest US federal taxes. However, my concern is that say I reduce my US tax from 5K to 3K, then this will lower the foreign tax credits on my Canadian return. Overall, I may still pay more taxes (to both US and Canada). Therefore, how can the amount of US tax not affect my Canadian return? I am afraid that I'll have to do all 3 ways for US federal, and I don't know how many ways for California state and then Canada to figure out which combination is best...
2) I agree with your calculation of gain on principal residence. Do I have to plan to sell it within a certain time period so to avoid US capital gain tax? My understanding is that if I meet the 2 year in 5 year use test in the US, we can each exclude 500K from capital gains (or something like that). i.e. if I hold on to my property for say 7 years after we left, then there is no way to meet the use test?
3) How does one calculate the "income" from a rental property in the US? In canada, I suppose it is just gross income minus all expenses. But I read that in US, the residence has to be depreciated according to some schedule?!
Many thanks again!
I feel the gain in Canada on the home is a bit more complicted. You do get the principle residence exemtion plus the one year (* that is in the calculation of capital gain guide on sale of principle residence) but you did not hold the home as a principle residence you changed its use to Rental from personal. When you have a change in use you are deemed to have disposed of the property at FMW then reacquired it again. So depending when you started to rent out teh home that is when you sold it for FMW and reacquired it back again so you may have already used up the one year extra numeral in the denominator.
You calculate the rent in the US same as Canada but you are required to take deprciation in the US so you will have recapture on selling it in the US of the depreciation. You should have been paying 25% witholding tax on the gross rental to Rev Canada they will most likely ask for the interest on non remitting when you file the sec 216 tax return on the rents in Canada.
The gain in the US if you occupied the home 2 out of the last 5 yrs as a principle residence you can exclude up to $ 500K of the capital gain, now in certian cases if you did not meet this test due to job transfer they will prorate the gain. Any tax software like turbo tax or tax cut can easily do teh rental income and depreciation for you.
You calculate the rent in the US same as Canada but you are required to take deprciation in the US so you will have recapture on selling it in the US of the depreciation. You should have been paying 25% witholding tax on the gross rental to Rev Canada they will most likely ask for the interest on non remitting when you file the sec 216 tax return on the rents in Canada.
The gain in the US if you occupied the home 2 out of the last 5 yrs as a principle residence you can exclude up to $ 500K of the capital gain, now in certian cases if you did not meet this test due to job transfer they will prorate the gain. Any tax software like turbo tax or tax cut can easily do teh rental income and depreciation for you.
JG
Thanks for your reply... It is taking awhile to digest the info.
One more specific question regarding the 2 out of 5 year use test. Lets say I bought it in 2008, and use it as principal residence for 3 years until 2011. Move to USA and change it to rental property. Sell in 2013. Does the 5 year period include the time I was in Canada and have no US connection whatsoever? i.e. does the 5 year period include 2008-2013?
I am asking as I know the cost basis for US tax purposes is the FMV at date of departure from Canada. Not sure if this also "reset" the clock for the 5 year period.
Is the cost basis the same for both Federal and state (California)?
One more specific question regarding the 2 out of 5 year use test. Lets say I bought it in 2008, and use it as principal residence for 3 years until 2011. Move to USA and change it to rental property. Sell in 2013. Does the 5 year period include the time I was in Canada and have no US connection whatsoever? i.e. does the 5 year period include 2008-2013?
I am asking as I know the cost basis for US tax purposes is the FMV at date of departure from Canada. Not sure if this also "reset" the clock for the 5 year period.
Is the cost basis the same for both Federal and state (California)?
The 5 year rule applies, but as JG says, the fact that you change it to renatal makes some of your gain taxable. the 2 in five rule 9as well as the treaty) prevents it from all being taxable.
If you sell in the sixth year, the treaty saves you from tax on the gain before you left canada, but nothing else.
The five year period is just that: the 5 years before you sell, regardless of where you lived.
If you sell in the sixth year, the treaty saves you from tax on the gain before you left canada, but nothing else.
The five year period is just that: the 5 years before you sell, regardless of where you lived.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best