Emigrating - does deemed disposition result in a US tax liability?

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crossborderguy
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Joined: Thu May 14, 2020 6:18 pm

Emigrating - does deemed disposition result in a US tax liability?

Post by crossborderguy » Thu May 14, 2020 6:43 pm

Situation;
Left Canada in 2019
Will be filing as a part year resident and indicated my date of departure
Own 50% of a property located in the US that will be reported as a deemed disposition
Will be claiming this as principal residence, so capital gains will be exempt

When I file my return;
1.) Would there be an issue with filing jointly with my spouse (US resident) by taking the spousal residence election (26 CFR § 1.6013-6)

If I were to take the spousal residence election;
2.) Would I be liable for the capital gains from the deemed disposition for my US property on our joint US (or State) income tax
3.) Would I be able to claim step-up cost basis for the property based on Article XIII (7) of the US/CAN Treaty
3.) Would I be able to claim US foreign tax credit based on the income I earned while in Canada to be applied on US income taxes?

crossborderguy
Posts: 4
Joined: Thu May 14, 2020 6:18 pm

Re: Emigrating - does deemed disposition result in a US tax liability?

Post by crossborderguy » Fri May 15, 2020 12:16 am

As a clarification to question 2.) I'm wondering if the deemed disposition for the Canadian departure tax would result in any capital gains calculations for my 2019 US federal and state tax returns.

nelsona
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Re: Emigrating - does deemed disposition result in a US tax liability?

Post by nelsona » Sat May 16, 2020 9:14 pm

1. No problem. Just make sure you report all world in come for the year on your 1040.
2. No. Are you sure you can claim the US property as Principal residence? You are indeed allowed to do this, but can you back up this claim, since you never lived there? The partial ownership may also be an issue.
3. You *could*, but you got two problems 1) you have no Cdn tax to write off against the US tax on the step-up. and 2) you would have US tax liability, since you cannot claim that you lived in this property (even if you get to claim it as your PR for Cdn tax purposes. And you can't use the PR exem[tion available from Article XIII(6) which must be Cdn property.
4. Of course. You could alternatively claim the foreign earned income exclusion on your Cdn wages
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

crossborderguy
Posts: 4
Joined: Thu May 14, 2020 6:18 pm

Re: Emigrating - does deemed disposition result in a US tax liability?

Post by crossborderguy » Sun May 17, 2020 1:24 am

Thank you for your reply this was extremely helpful!

Regarding #2, could you help confirm that we can use the principal residence exception? If...
- I own the home jointly (50/50) with my spouse (nonresident of Canada, resident of USA for tax purposes)
- I have been a Canadian tax resident all years I've owned the home
- My spouse has lived in the home since the home was acquired
- I have spent some time at the home there every year since the home was acquired.
- My spousal will not be making any principal residence designation (because he is a nonresident for Canadian tax purposes)
- The home is a housing unit and is not used for rental or other purposes.

5.) As a follow up question I was wondering if an OSAP Grant/Scholarship (T4A Box 105), needs to be reported as foreign income on US federal/state income taxes.

nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
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Re: Emigrating - does deemed disposition result in a US tax liability?

Post by nelsona » Sun May 17, 2020 8:13 am

It looks like you meet the PR requirements. It would have been important to mention the spouse, no?
Also, since you are married, it would be best for BOTH of you that you file jointly in US and trhis file full year 1040. Ho whas your spouse been fing in the past? MFS is punitive, and she likely paid more tax than she should have throughout your married life.

On your 1040, you need to report ALL world income for the year. You would also need to report it on your CDn departure return.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

crossborderguy
Posts: 4
Joined: Thu May 14, 2020 6:18 pm

Re: Emigrating - does deemed disposition result in a US tax liability?

Post by crossborderguy » Mon May 18, 2020 5:56 pm

Thanks for confirming and apologies for not mentioning the spouse. We will be filing MFJ.
Agree that we need to report all world wide income for the year on the 1040.

Wondering specifically however if an OSAP grant/scholarship for a Canadian university, needs to be reported on the 1040 return, as I believe scholarships for tuition for eligible institutions would not be US taxable income.

nelsona
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Re: Emigrating - does deemed disposition result in a US tax liability?

Post by nelsona » Tue May 19, 2020 9:07 am

You would need documentation from the Cdn university compliant with US rules on that.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

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