dual citizen, capital gains on selling the home

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igrek
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Joined: Wed Aug 13, 2014 4:38 am

dual citizen, capital gains on selling the home

Post by igrek »

Are capital gains from selling the primary residence home in Canada considered as "General category income" for form 1116 "Foreign Tax Credit"?

My wife and I are US citizens living in Canada. We plan to sell our house in Canada that has been our only home for 15 years. Over the 15 years, the price of the house has grown a lot, and our capital gains from selling the house will be much higher than the maximum exclusion limit of $500,000. If the answer to the above question is "yes", then we do not have to pay capital gains tax since it will be offset by the accumulation of foreign taxes in the general income category carried over from previous years.
nelsona
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Re: dual citizen, capital gains on selling the home

Post by nelsona »

Yeah, that is a tough surprise that Americans living in Ontario and BC get hit with.

Sorry, but Gains from your home are considered passive. From the 1116 guide: "Capital gains not related to the active conduct of a trade or business are also generally passive income."
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
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igrek
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Joined: Wed Aug 13, 2014 4:38 am

Re: dual citizen, capital gains on selling the home

Post by igrek »

Thank you Nelsona. My wife is self-employed (music teacher) with business located at our house. Does this make the capital gains from selling the house eligible to be considered as general category income?
nelsona
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Re: dual citizen, capital gains on selling the home

Post by nelsona »

No. gains related to the active conduct of trade or business would refers to day-trading or house flippers.

The only relief I can suggest is going back over the time you owned the home and adding the cost of any eligible renos and upgrades you made to the cost basis. You may not have tracked these too closely considering this was your principal residence, but these are useful in the situation you now face.

And remember to evaluate the buying price, cost basis changes and sell price in USD at the time of each event.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
igrek
Posts: 10
Joined: Wed Aug 13, 2014 4:38 am

Re: dual citizen, capital gains on selling the home

Post by igrek »

Thank you
igrek
Posts: 10
Joined: Wed Aug 13, 2014 4:38 am

Re: dual citizen, capital gains on selling the home

Post by igrek »

Are there any other US taxes associated with selling the primary residence (other than the capital gains tax)?

I've seen an opinion that the 3.8% Obamacare tax is applicable to the portion of the capital gains above the $500,000 exclusion threshold. Is this correct?

Also, is there anything related with mortgage taken in a year with one exchange rate and paid off in years with different exchange rates? I imagine that the mortgage interest paid will offset any differences, but does it need to be calculated and reported?
nelsona
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Re: dual citizen, capital gains on selling the home

Post by nelsona »

Tr*mp did away with that tax, so don't worry about it. Your software should be taking care of all this.

As ti that mortgage thingy it is only if the Cdn exchange rate was HIGHER when you got the mortgae than when you settled it. Otherwise don;t worry about it.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
igrek
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Joined: Wed Aug 13, 2014 4:38 am

Re: dual citizen, capital gains on selling the home

Post by igrek »

The long-term capital gains rate is 15% if the taxable income is below certain threshold ($501,600 if married filing jointly in 2021) and 20% if the income is above the threshold. So, my understanding is that if the capital gains from selling the home are $800,000, other income $200,000, then the rate 15% applies (800,000 minus exclusion 500,000 plus income 200,000 is 500,000 which is less than the threshold 501,600), and the capital gains tax will be 45,000. But if in this situation the other income is 202,000 instead of 200,000, we are above the threshold, and the capital gains tax will be 60,000. Am I getting something wrong? It does not make sense logically that an extra 2 thousand if income increases tax obligation by 15 thousand.
nelsona
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Re: dual citizen, capital gains on selling the home

Post by nelsona »

Yes. The cutoff has to be at *some* point.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
igrek
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Joined: Wed Aug 13, 2014 4:38 am

Re: dual citizen, capital gains on selling the home

Post by igrek »

If there is a Foreign Mortgage Gain (a positive difference between the value of mortgage in US dollars when taken and when discharged due to a change in exchange rate), is it attributed to the General Category Income on form 1116 "Foreign Tax Credit"?
nelsona
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Re: dual citizen, capital gains on selling the home

Post by nelsona »

it is passive income.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
igrek
Posts: 10
Joined: Wed Aug 13, 2014 4:38 am

Re: dual citizen, capital gains on selling the home

Post by igrek »

The amount of mortgage at discharge should also include the interest paid, right? Then the Foreign Mortgage gain would rarely be positive, even if the exchange rate changes unfavorably. Do I understand this correctly?
nelsona
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Re: dual citizen, capital gains on selling the home

Post by nelsona »

There are examples on the internet which go through the calculation. Follow those, and see. The gain usually occurs when the exchange rate of the foreign currency goes DOWN between the time you "bought" the mortgage and the time you "sold" it.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
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