Reduced maximum Exclusion - CG

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mv2006
Posts: 3
Joined: Mon Oct 16, 2006 11:16 am

Reduced maximum Exclusion - CG

Post by mv2006 »

Hi everybody,

I am reading this forum since I discovered it, for a couple of days now, and I find it very useful. I have been on IRS site for another couple of days reading the publications related to CG and I need some help.
I would appreciate an input and second opinions, if anybody is or has been in similar situations, regarding the following:

Facts: I and my husband are Canadian citizens, currently living in US on my husband’s H1B visa (I am on a H4 visa). We came to US in 2003 on a TN, respectively TD visa and switched in 2004 to H1B/H4.
When we moved to US, we rented our house in Canada, B.C. – after only living in it for 10 months. Reason for moving: my husband change place of employment.
This year we decided to sell our house in Canada as my husband continued to work with the same employer and they are in the process of filing an I140 petition for us. Another reason has been the fact that we decided that if the I140 doesn’t go through, when returning to Canada we would not go back to B.C., and rather go to Ontario, so the suitability of the property as a home materially changed.

Questions: The fact that the house has been rented and we do not meet the use test for the capital gain exclusion, means that we do not qualify not even for the reduced maximum exclusion?
On the other hand, calculating CG on the sale of the house for US tax purposes, using the rate of exchange prevailing as of date of the purchase and date of sale, respectively, gives me a “phantomâ€￾ capital gain. Is this taxable?

To sum all of this, am I to understand that even with all the right reasons for moving and selling the house that would qualify for a CG exemption, the fact that has been rented out makes me not eligible for any CG exemptions, and on top I have to pay taxes on a “phantomâ€￾ capital gain? It doesn’t make a lot of sense. Am I missing anything that might help minimize the tax liability on my US tax return?

Thanks in advance for any answers!
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

I'm sure you done your research on the rent/exclusion issue, so I'lll leave you to it.

As to the capital gain for US purposes, it will be based on the VALUE in US$ on the day you left Canada, and the proceeds in US$ the day you sold, and will also include all the depreciation that you charged against the propery. Deprciation is mandatory in US.

I don't know why you would think that the gain, in US$, would be 'phantom', since appreciation of the $C is a viable gain; the reverse situation would be just as reasonable.

You can us the cap gains taxyou pay in Canada as a credit on your 1040.

I trust you have ben compliant will all the Cdn tax requirements in terms of retal income, Section 216, and sales reporting.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
mv2006
Posts: 3
Joined: Mon Oct 16, 2006 11:16 am

Post by mv2006 »

Thanks for your prompt reply.

I have complied with all the CAd tax requirements, and that side of the story I have it all figured out.

I am only struggling with the US tax return.

You said that the capital gain for US purposes will be based on the VALUE in US$ on the day I left Canada. Can you quote me the IRS publication stating that? I did my research regarding that on the internet, couldn’t find much and I called IRS: they told me the cost should be at the exchange rate from the date the property was purchased. Were they wrong?

And, one more thing: what do you mean by “rent/exclusion issueâ€￾?

Thanks again.
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

The rent/exclusion issue was what you had initilly brought up in your post; I would agree with your assessment that you cannot exclude any of the cap gains becuse you didn't fulfill the 2 year requirement, and you did not sell because of the move.

As to what you basis is for cap gains on your Cdn home, thetreaty takes precedence:

Article XIII (6):
" Where an individual (other than a citizen of the United States) who was a resident of Canada became a resident of the United States, in determining his liability to United States taxation in respect of any gain from the alienation of a principal residence in Canada owned by him at the time he ceased to be a resident of Canada, the adjusted basis of such property shall be no less than its fair market value at that time."
So, in your case, you either choose the day you left (valued in US$ on that day), or your purchase price, in US$ valued on the day you bought it, which ever is MOST.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
mv2006
Posts: 3
Joined: Mon Oct 16, 2006 11:16 am

Post by mv2006 »

Hi Nelson,

I am going in circles here. Please help!

The rent / exclusion issue was my biggest, as I believe is a matter if interpreting the tax law.

Once again, the reason we moved after 10 months was the actual change in place of employment of my husband.

The reason of selling was that he continued to work for the same employer and the suitability of the property as a home materially changed.

Employmnet - defined in P 523 on IRS site - is: For this purpose, employment includes the start of work with a new employer or continuation of work with the same employer.

But, under BUsiness Use or rental of Home ( same publication ) I found the following: " You may be able to exclude your gain from the sale of home that you used for business or to produce rental income. But you must meet the ownership and use tests."
Period. And no mention about the exemptions any further.

There is where I am not sure as what to believe or if there is any room for interpretation.

Same publication: achange in place of employment, health or unforeseen circumsatnces ( whichever applies ) is considered to be the reason you sold your home if either of the following is true:
- the circumstances causing your sale occurred during the time you owned and used the property as your main home - also TRUE in my case.
- the circumstances causing your sale were not reasonably foreseeable when you began using the property as your home - also TRUE.

I would appreciate your thoughts regarding this, and thank you in advance.
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

"But you must meet the ownership and use tests."


I gave you my opinion on this: I don't think you qualify, becuse you met neither of these tests. Its not an issue of why you moved, its that you didn't live there long AND you rented it out after moving -- hardly a hardship.

I wouldn't fret too much though, as you will have a taxable gain in canada (based on 22 months of residnce -- 10 months plus one year) and you can use theCdn tax as a credit.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

... and you are already getting the treaty exemption for the 10 months you lived there before moving to US.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
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