Timing differences - recapture of rental home converted to personal

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mackayr
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Joined: Wed Apr 14, 2010 9:37 pm

Timing differences - recapture of rental home converted to personal

Post by mackayr » Sat Apr 13, 2019 10:55 am

OK ... it seems there should be a way out of this, but I have yet to find one. Here's the scenerio.

1) Taxpayer (US Citizen) moved from US to Canada 11 years ago. Expected to stay in Canada indefinitely. Entire family moved to Canada. No question on residency ... Canadian residents.
2) Taxpayer retained US home and rented it out. Since they didn't report it on Canadian return (whoops), we did VDP for T1135s not filed, and claimed enough CCA to reduce tax to NIL back to 2010. So ... a lot of CCA was claimed - around $4k per year.
3) Late last year, decided to move back to US. Terminated rental in November and moved back.

So ... on the Canadian side, we have recapture of CCA and capital gain, leading to large tax bill.
On the US side, there's nothing to report since it was merely converted back to personal use. The recapture (and any applicable gains) will be taxed when they ultimately sell it.

Obviously this creates a double tax situation, where they pay tax in Canada now (with little to no US tax to use as FTC), and pay tax in the US on the recapture when it's ultimately sold.

I can't see any election or tax treaty provision which prevents this unfortunate situation.

Any thoughts?

mackayr
Posts: 63
Joined: Wed Apr 14, 2010 9:37 pm

Re: Timing differences - recapture of rental home converted to personal

Post by mackayr » Mon Apr 15, 2019 9:52 am

Still trying to figure out a solution to this. Does anyone know of a way to claim the gain/recapture on the US side earlier? At least that way it would be taxed now (offsetting part of the Canadian income tax), to avoid double tax in the future.

nelsona
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Re: Timing differences - recapture of rental home converted to personal

Post by nelsona » Mon Apr 15, 2019 10:19 am

Since this was a deemed disposition on departure from Canada, it is governed by rev proc 2010-19, which allows you to elect with IRS to have sold the property for US tax purposes. This would be under the provisions of 4.01 of the Rev proc. The Cdn tax can be used against the US tax arising from the "election".

This is the same with all your deemed dispositions, with the added quirk that this property was taxable in US all along.

You settle up in US and Canada, and start over.
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.

nelsona
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Re: Timing differences - recapture of rental home converted to personal

Post by nelsona » Mon Apr 15, 2019 10:32 am

And because it was a US property, Canada is the one that you get the credit from first.
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.

mackayr
Posts: 63
Joined: Wed Apr 14, 2010 9:37 pm

Re: Timing differences - recapture of rental home converted to personal

Post by mackayr » Mon Apr 15, 2019 11:46 am

OK .. at risk of splitting hairs:

1) They technically emigrated 11 days after terminating the rental. Rental was terminated on Nov 30th, at which time the residence was their own personal use property again. On December 11th, they emigrated from Canada. Technically, for those 11 days, they had two homes. Admittedly I hadn't found that Rev. Proc. because I wasn't researching deemed disposition on emigration, although I suppose that means that I should report a sale as personal use property for the 11 days. Would that Rev. Proc. still have application here, or only to the extent that the gain relates to the deemed disposition on emigration?

2) They intend on living in the US home indefinitely. Is there any point at which the depreciation claimed wouldn't have to be recaptured?

nelsona
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Re: Timing differences - recapture of rental home converted to personal

Post by nelsona » Mon Apr 15, 2019 12:47 pm

it is not the change of use that is affects this, it is strictly the deemed disposition. I would not worry about the change of use.

This is treated like a sale by IRS, so all has to be settled at time of deeming, so NOW.
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.

mackayr
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Joined: Wed Apr 14, 2010 9:37 pm

Re: Timing differences - recapture of rental home converted to personal

Post by mackayr » Mon Apr 15, 2019 4:14 pm

After crunching the numbers, the $37k recapture now would only result in a $1,900 tax payable, meaning that the FTC on the Canadian return is only $450 (roughly quarter of the income on the US is from the recapture if they did elect to report it). So, in addition to the $1,900 tax payable, they also lose $2,800 CTC, meaning the US tax hit is $4,700. So ... immediate cost is $4,250 and future savings is uncertain. If they keep the home until they retire, tax might only be $3,700 (assuming 10% tax), so no advantage.

There are no other assets other than bank accounts, so no deemed dispositions on the Canadian side.

Needless to say, I'm definitely going to file this conversation, as I wasn't aware of that election, but it doesn't apply presently.

Thanks!

nelsona
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Re: Timing differences - recapture of rental home converted to personal

Post by nelsona » Mon Apr 15, 2019 7:14 pm

Indeed. The deemed disposition is unavoidable. But you are in no way obliged to make the election for IRS.

Just as a reminder, since the property was acquired before arriving in Canada, it was also subject to deemed acquisition when they arrived, meaning that it has a cost basis based on arrival in Canada value, not the "original" cost basis.That might lower their cdn tax.
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.

mackayr
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Joined: Wed Apr 14, 2010 9:37 pm

Re: Timing differences - recapture of rental home converted to personal

Post by mackayr » Wed Apr 17, 2019 6:49 pm

Yeah ... I'm aware of the deemed acquisition, but to be honest, the original purchase would have been better. They moved to Canada in late 2010 ... pretty well when the US dollar bottomed out ... so the majority of the gain is in the exchange rate.

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