Capital gains on US property
Moderator: Mark T Serbinski CA CPA
Capital gains on US property
I am a US permanent resident (pay tax to everyone!), buying a house in the US with my husband who is non resident & has no US income. We will maintain a residence in Canada and my husband will spend no more than the allowed 180 days in the US each year, but are likely to sell our existing house in Toronto. Will my husband have to file US tax returns and will we be liable for Capital gains on the sale of the house in Canada?
Since you are required to file a US tax return every year, and since you are married, your only choices as to how to file in US are:
(a) married filing separately, reporting nothing for your husband, but being taxed at a higer rate,
or
(b) married filing jointly, reporting World income for both of you, and possibly exempting your and/or his Cdn-source wages only.
You will make this decision on a year by year basis.
Generally, a person in your situation will evaluate every year, which of these 2 options yields the lower tax.
As you will see, its not the spending of less than 180 days that will result in low tax, it will be his ability (and perhaps yours) to use the foreign earned income exclusion for his wages, so you had best become very familiar with Form 2555 and its qualifications. Also IRS Pub 519, and Pub. 54.
Otherwise, you will probably see your US taxrate soar well above the Ontario taxrate.
Now, as to the taxation of the Cdn home, if you have lived in the house 2 year within the last 5 before selling, non of the gains are taxable in US.
<i>nelsona non grata... and non pro</i>
(a) married filing separately, reporting nothing for your husband, but being taxed at a higer rate,
or
(b) married filing jointly, reporting World income for both of you, and possibly exempting your and/or his Cdn-source wages only.
You will make this decision on a year by year basis.
Generally, a person in your situation will evaluate every year, which of these 2 options yields the lower tax.
As you will see, its not the spending of less than 180 days that will result in low tax, it will be his ability (and perhaps yours) to use the foreign earned income exclusion for his wages, so you had best become very familiar with Form 2555 and its qualifications. Also IRS Pub 519, and Pub. 54.
Otherwise, you will probably see your US taxrate soar well above the Ontario taxrate.
Now, as to the taxation of the Cdn home, if you have lived in the house 2 year within the last 5 before selling, non of the gains are taxable in US.
<i>nelsona non grata... and non pro</i>
Thanks! I spent many happy minutes/hours reading all the forms and publications - yippee.......
OK I think we've got my husband's situation sorted out - he has no earned income - all his income is in Canada from pension, interest & dividends - so he found the appropriate form (on your site!) which allows him to be in the US for a max of 180 days (which ends being 130 according to the calculation of present and past years), and which he submits to the IRS to indicate that he remains a Canadian resident (significant presence as determined by owning property, having a driver's licence etc. in Canada) - so he does not file a US return.
Two more questions - should I be also filing this form, OR as a permanent resident with a green card, will I jeopardise my green card status if I file this form? I doubt that it will have any impact on my taxation situation as I will still be earning income in the US, and paying tax on it.
The other question relates to capital gains again, and was what I forgot to ask last time - will the US property be subject to capital gains when we eventually sell it - in either the US or Canada? Bearing in mind that it will be our principal residence in the US, but we will also still have a residence in Canada.
Margaret
OK I think we've got my husband's situation sorted out - he has no earned income - all his income is in Canada from pension, interest & dividends - so he found the appropriate form (on your site!) which allows him to be in the US for a max of 180 days (which ends being 130 according to the calculation of present and past years), and which he submits to the IRS to indicate that he remains a Canadian resident (significant presence as determined by owning property, having a driver's licence etc. in Canada) - so he does not file a US return.
Two more questions - should I be also filing this form, OR as a permanent resident with a green card, will I jeopardise my green card status if I file this form? I doubt that it will have any impact on my taxation situation as I will still be earning income in the US, and paying tax on it.
The other question relates to capital gains again, and was what I forgot to ask last time - will the US property be subject to capital gains when we eventually sell it - in either the US or Canada? Bearing in mind that it will be our principal residence in the US, but we will also still have a residence in Canada.
Margaret
Margaret, you seem to be missing the point about being MARRIED, and being a GC.
Since you are a GC, YOU MUST file a US tax return. A full-fledged 1040. You are not allowed to claim to have a closer connection to another country. Your only recorse to lower US tax is thru foreign tax credits on your foreign income.
Since you are MARRIED, if you don't file with your spouse, including all his income, YOU will end up paying A LOT more tax on YOUR income, perhaps so much more that you will owe more in US than in Canada!
So, regardless of whether he sets foot in US or not, you will likely find it to your advantage to file Jointly, reporting all your <u>and his </u> income, and then taking foreign tax credits for the Cdn tax <i>he </i> pays on <i>his </i> Cdn income.
You will have to do the numbers every year, but I'm pretty sure that you will find that this will end up with the lower tax overall.
you can *probably* work out a scheme to make the US home your pricipal residence in the eyes of IRS, while at the same time making the CRA think your principal residence is in Canada, but beware that such a scheme could back-fire, with both residences becoming fully taxable at sale. At the very least, one of the homes will be taxable in Canada. Whether or not the house(s) are taxable in US will depend on your living arrangemnts in the 5 years preceding the sale of either home.
<i>nelsona non grata... and non pro</i>
By the way, this is not my site.
Since you are a GC, YOU MUST file a US tax return. A full-fledged 1040. You are not allowed to claim to have a closer connection to another country. Your only recorse to lower US tax is thru foreign tax credits on your foreign income.
Since you are MARRIED, if you don't file with your spouse, including all his income, YOU will end up paying A LOT more tax on YOUR income, perhaps so much more that you will owe more in US than in Canada!
So, regardless of whether he sets foot in US or not, you will likely find it to your advantage to file Jointly, reporting all your <u>and his </u> income, and then taking foreign tax credits for the Cdn tax <i>he </i> pays on <i>his </i> Cdn income.
You will have to do the numbers every year, but I'm pretty sure that you will find that this will end up with the lower tax overall.
you can *probably* work out a scheme to make the US home your pricipal residence in the eyes of IRS, while at the same time making the CRA think your principal residence is in Canada, but beware that such a scheme could back-fire, with both residences becoming fully taxable at sale. At the very least, one of the homes will be taxable in Canada. Whether or not the house(s) are taxable in US will depend on your living arrangemnts in the 5 years preceding the sale of either home.
<i>nelsona non grata... and non pro</i>
By the way, this is not my site.
By the way, as to the "Closer Connection" 8840 form.
Read the instructions:
Your spouse does not have to file this form if he never meets the SPT.
It is only if he meets the SPT (which, as you saw, can happen by staying 130 days a year for 3 years) but stays less than 183 days in a calendar year.
I would not necessarily rely on this form, since, as you can see by the questions, it is 'iffy' if he would qualify.
In any event, you most likely will not be using this, since you will be filing jointly, as outline above, and if push came to shove and IRS 'forced' him to file, the treaty (not 8840) would be a more useful defense.
<i>nelsona non grata... and non pro</i>
Read the instructions:
Your spouse does not have to file this form if he never meets the SPT.
It is only if he meets the SPT (which, as you saw, can happen by staying 130 days a year for 3 years) but stays less than 183 days in a calendar year.
I would not necessarily rely on this form, since, as you can see by the questions, it is 'iffy' if he would qualify.
In any event, you most likely will not be using this, since you will be filing jointly, as outline above, and if push came to shove and IRS 'forced' him to file, the treaty (not 8840) would be a more useful defense.
<i>nelsona non grata... and non pro</i>