Hello,
My question is about capital taxes only. I become a US resident the day I leave Canada in this example.
I'm Canadian going to US on a TN visa for many years and have a Canadian principal residence.
What is better tax-wise if I convert my Canadian principal residence into rental before leaving Canada or after?
Situation 1
If conversion occurs before my departure: I'm tax free for CRA because of the exemption on my principal residence, there's a deemed disposition for CRA because of the conversion to rental and I arrived in USA with only rental property. In a couple of years, I decide to sell my rental and to pay taxes to US as a US resident. Will I be able to use FMV (fair market value) of my rental property frozen on the day I left Canada (they call it a step-up) or I will have to use a historical value of my rental property which is, I suppose, the purchase price of 2021?
Is there any other deemed disposition for US taxes, I should be aware of, only because I cross the border and have a Canadian rental property?
Situation 2
If conversion occurs after my departure: for CRA, I'm tax free on my residence until the day I left Canada. In US, I pay US taxes on a deemed disposition at the moment the conversion (from residence to rental) occurs. I use a FMV of my residence on the day I become a US tax resident. My taxes will be nil as there's a US exemption for 250k. Do I owe anything to Canada for the period between I left Canada for good and the moment of conversion while already a US tax payer? In a few years, I decide to sell this rental property while still in US. To pay US taxes, do I take the value of my rental from the moment of conversion or there may be some other historical value taken as a base for taxes?
Thank you for your attention,
Canada-USA capital gains on rental property
Moderator: Mark T Serbinski CA CPA
Re: Canada-USA capital gains on rental property
The treaty allows a Cdn resident leaving for the US to use the FMV on departure date of their principal residence for any future US taxation on the property. (Article XIII.6). However it does stipulate that the property would be the principal residence "at that time".
So in situation 2, you would simply begin to rent when or after you left. No tax would arise in canada but neither would that trigger be any tax in US, regardless of when you began renting. You would "settle up" when you sold the property. You would not do a apply for election in Canada for change in use. Your ceasing residency takes care of that. When you sell the property, then you would pay Canada and US gains tax, essentially on the gain after departure, Canada gives you an extra year of principle residence when determining your gain.
Situation 1 becomes a bit more murky, as IRS could decide that Article XIII.6 doesn't apply because it wasn't your residence "at the time" of ceasing residency. Then you fall under normal IRS rules for someone converting their home to a rental. This *might* expose your pre-departure gains to US tax, espeiclly if you do not sell the property within three years of changing its use.
If I were you I would be coinciding my departure with beginning renting.
Be awar that renting out your property as a non-resident has its own rules for withholding, etc. And that in US you MUST depreciate rental property, wher in Canada you do not have to, which can cause a tax mismatch.
So in situation 2, you would simply begin to rent when or after you left. No tax would arise in canada but neither would that trigger be any tax in US, regardless of when you began renting. You would "settle up" when you sold the property. You would not do a apply for election in Canada for change in use. Your ceasing residency takes care of that. When you sell the property, then you would pay Canada and US gains tax, essentially on the gain after departure, Canada gives you an extra year of principle residence when determining your gain.
Situation 1 becomes a bit more murky, as IRS could decide that Article XIII.6 doesn't apply because it wasn't your residence "at the time" of ceasing residency. Then you fall under normal IRS rules for someone converting their home to a rental. This *might* expose your pre-departure gains to US tax, espeiclly if you do not sell the property within three years of changing its use.
If I were you I would be coinciding my departure with beginning renting.
Be awar that renting out your property as a non-resident has its own rules for withholding, etc. And that in US you MUST depreciate rental property, wher in Canada you do not have to, which can cause a tax mismatch.
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
Re: Canada-USA capital gains on rental property
Thank you very much for an instant answer. I really appreciate.
There're a lot of points to consider and I'm still processing and re-reading the Canada-Us treaty. I'm sure to have more questions today but this is the first ones that come immediately:
Do you think that a Canadian plus-one-year rule works if you cease your Canadian residency somewhere in 2024 and your house is vacant for some months in 2025 and then finally rented. When the sale occurs, while a US resident, I'm afraid that CRA would want to refuse the principal residence exemption for 2025. And if this happens, would I be able to use FMV from the time I become non-resident or they will automatically apply their formular and calculate a taxable portion for 2025: 3 years - principal residence, 1 year - non resident so no exemption for this year and, as a result, 25% of cap gains are taxed.
When you say "coincide" my departure and my renting, how much at the same time should it happen? I give my key to a tenant on Monday and slowly, with three kids, drift to US border and finally cross it on Wednesday. In this example, do I cross the US border with a renting property or with my principal residence? I'm particularly uncomfortable when the treaty says: a principal residence in Canada owned by him /at the time he ceased to be/ a resident of Canada. It looks like they fix the time and you almost have to cross the border first and give a key to a tenant after you are ceasing to be a Canadian resident. One of the worst scenarios, as I understand, if I convert my principal residence into rental, make a tour of Canada for a week and only after cross the US border. In this case, would I be able to shelter this week just by electing under Canadian laws, being still Canadian resident, this short renting period?
And also these 2+3 years in US laws to have a US 250k exemption, will it disturb IRS in any way if i actually rent my principal residence after crossing the border or at the same time?
Thank you again and I will continue to re-read your first answer with the treaty,
There're a lot of points to consider and I'm still processing and re-reading the Canada-Us treaty. I'm sure to have more questions today but this is the first ones that come immediately:
Do you think that a Canadian plus-one-year rule works if you cease your Canadian residency somewhere in 2024 and your house is vacant for some months in 2025 and then finally rented. When the sale occurs, while a US resident, I'm afraid that CRA would want to refuse the principal residence exemption for 2025. And if this happens, would I be able to use FMV from the time I become non-resident or they will automatically apply their formular and calculate a taxable portion for 2025: 3 years - principal residence, 1 year - non resident so no exemption for this year and, as a result, 25% of cap gains are taxed.
When you say "coincide" my departure and my renting, how much at the same time should it happen? I give my key to a tenant on Monday and slowly, with three kids, drift to US border and finally cross it on Wednesday. In this example, do I cross the US border with a renting property or with my principal residence? I'm particularly uncomfortable when the treaty says: a principal residence in Canada owned by him /at the time he ceased to be/ a resident of Canada. It looks like they fix the time and you almost have to cross the border first and give a key to a tenant after you are ceasing to be a Canadian resident. One of the worst scenarios, as I understand, if I convert my principal residence into rental, make a tour of Canada for a week and only after cross the US border. In this case, would I be able to shelter this week just by electing under Canadian laws, being still Canadian resident, this short renting period?
And also these 2+3 years in US laws to have a US 250k exemption, will it disturb IRS in any way if i actually rent my principal residence after crossing the border or at the same time?
Thank you again and I will continue to re-read your first answer with the treaty,
Re: Canada-USA capital gains on rental property
The moment you leave canada, your Cdn home ceases to be considered your principle residence. By CRA rules, when you finally sell, you get the actual time it was your PR, PLUS 12 months. Nothing to do with the treaty. Nothing they can deny. Doesn't matter what you do with the house, rent it leave it empty, doesn't matter, you get the extra 12 months. This is all calculated when you SELL, not when you change use. Could be next year, could be 10 year from now.
For US, if you lived in your home for 2 years in the 5 years before SELLING, you can claim the $250K exemption. However, if your overall gain is more than this, or if you rent the property longer than 3 years after moving, then you can use the treaty to reset your cost basis to FMV when you left IF you were living there when you left Canada.
No tax is triggered, in either US or Canada, when you change the use of the property from personal to rental.
You become a US tax resident when you buy/rent a home in US. That could be a couple of months before you rent out the Cdn house. Note that I said begin to rent "when or after your move". Most people on TN find a place to live near work, and then move their stuff, and then sell or rent.
I'm saying it would be safer (tax treaty-wise) and more practical to keep your home until you have a place to move your stuff.
For US, if you lived in your home for 2 years in the 5 years before SELLING, you can claim the $250K exemption. However, if your overall gain is more than this, or if you rent the property longer than 3 years after moving, then you can use the treaty to reset your cost basis to FMV when you left IF you were living there when you left Canada.
No tax is triggered, in either US or Canada, when you change the use of the property from personal to rental.
You become a US tax resident when you buy/rent a home in US. That could be a couple of months before you rent out the Cdn house. Note that I said begin to rent "when or after your move". Most people on TN find a place to live near work, and then move their stuff, and then sell or rent.
I'm saying it would be safer (tax treaty-wise) and more practical to keep your home until you have a place to move your stuff.
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
Re: Canada-USA capital gains on rental property
"By CRA rules, when you finally sell, you get the actual time it was your PR, PLUS 12 months."
Thank you, I've just found this formula: 1 year + number of years you're a Canadian resident and live in your PR/number of years of ownership.
This would be perfect for us if we haven't already spent this extra year filing the year of moving from an old residence into a new one. Is it still possible to change? I mean, does the CRA accept changes like this? We just answered a simple question without any tax planning strategy for the 2021 year return for the sale of the house with almost no capital gains.
Thank you very much,
Thank you, I've just found this formula: 1 year + number of years you're a Canadian resident and live in your PR/number of years of ownership.
This would be perfect for us if we haven't already spent this extra year filing the year of moving from an old residence into a new one. Is it still possible to change? I mean, does the CRA accept changes like this? We just answered a simple question without any tax planning strategy for the 2021 year return for the sale of the house with almost no capital gains.
Thank you very much,
Re: Canada-USA capital gains on rental property
CRA allows sequential moves and still consider your home as principle residence.
When you say you "found" the formula... I already gave it to you.
When you say you "found" the formula... I already gave it to you.
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
Re: Canada-USA capital gains on rental property
I used https://3saestate.com/dubai/for-sale/dubai-hills/ to figure out where I stood with the Canada/US tax situation after moving for work. It made it way easier to understand what I’d owe where, especially with the different rules around residency and property. Helped me avoid filing the wrong forms or missing stuff that might flag things later.