Deemed disposition of US rental condo

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

Moderator: Mark T Serbinski CA CPA

Post Reply
queenwest
Posts: 14
Joined: Tue Mar 02, 2010 11:13 am

Deemed disposition of US rental condo

Post by queenwest »

hello there,
We recently moved to the US and we are preparing to file our CDN taxes for 2021. I understand that Canada will charge capital gains tax (deemed disposition) on our rental property located in the US. I'm not planning to sell this condo but may do so in a few years. I have two questions:

1. Will the FMV on the departure date from Canada be used as the cost basis for calculating capital gains tax or will the capital gains be based on original purchase price?
2. Can I use the capital gains tax paid in Canada against the US capital gains? (ie can the amount paid in Canada be credited on the US when we actually sell it?)

thank you!
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Deemed disposition of US rental condo

Post by nelsona »

In this rare case of a Cdn emigrant owning US taxable property, there is a procedure (IRS REv. Proc 2010-19) which governs.

The US will always get the full tax for this property, so any tax credit must be on the Cdn side.

You will report the deemed disposition in Canada, but ALSO on your US tax return, using the FMV minus cost basis to determine tax on both returns. Then Canada will credit you with any US tax you pay as a result of this fake sale.

Going forward, you will owe US tax only on the gain after you left Canada.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
queenwest
Posts: 14
Joined: Tue Mar 02, 2010 11:13 am

Re: Deemed disposition of US rental condo

Post by queenwest »

Thanks so much nelsona! This is very good info! I guess I have to figure out the timing of the two returns in order to receive the 'credit' on the CDN end...
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Deemed disposition of US rental condo

Post by nelsona »

Not really. Credits are based on the tax return you prepare, not when you send it in, so there is no timing involved. Of course you do need to do both without any foreign tax credits, before you can actually determine the credit.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
queenwest
Posts: 14
Joined: Tue Mar 02, 2010 11:13 am

Re: Deemed disposition of US rental condo

Post by queenwest »

Got it! Thanks! So I guess in general, I'm safe to assume that due to the treaty in place, I won't be exposed to a double taxation situation due to this move.
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Deemed disposition of US rental condo

Post by nelsona »

Not so much the treaty, but that Rev Proc that I mentioned. Of course, it is likely that the US tax won't fully cover your Cdn tax, that is normal
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Ulipetovay
Posts: 3
Joined: Sat Mar 11, 2023 10:00 am

Re: Deemed disposition of US rental condo

Post by Ulipetovay »

Typically, the cost basis for calculating capital gains tax is the original purchase price plus any improvements made to the property.
Ulipetovay
Posts: 3
Joined: Sat Mar 11, 2023 10:00 am

Re: Deemed disposition of US rental condo

Post by Ulipetovay »

Typically, the cost basis for calculating capital gains tax is the original purchase price plus any improvements made to the property. However, regarding a deemed disposition, the FMV on the departure date from Canada may be used instead. You'll want to double-check with a tax professional to make sure. You may use the capital gains tax paid in Canada as a foreign tax credit on your US tax return. This will depend on several factors, so it's best to consult a tax expert. By the way, if you're looking for a luxurious property to invest in, check out [url=https://thereserveresidences-jalananakbukit.sg/]the reserve residences far east[/url]! Good luck with your taxes!
Ulipetovay
Posts: 3
Joined: Sat Mar 11, 2023 10:00 am

Re: Deemed disposition of US rental condo

Post by Ulipetovay »

Typically, the cost basis for calculating capital gains tax is the original purchase price plus any improvements made to the property. However, regarding a deemed disposition, the FMV on the departure date from Canada may be used instead. You'll want to double-check with a tax professional to make sure. You may use the capital gains tax paid in Canada as a foreign tax credit on your US tax return. This will depend on several factors, so it's best to consult a tax expert. By the way, if you're looking for a luxurious property to invest in, check out https://thereserveresidences-jalananakbukit.sg/! Good luck with your taxes!
llcofthedraw
Posts: 2
Joined: Thu Jun 01, 2023 11:19 pm

Re: Deemed disposition of US rental condo

Post by llcofthedraw »

@nelsona, I read the IRS procedure and am nonetheless confused.

I'm a US citizen, going to leave Canada in 2024. I have multiple rental properties in the US.

The procedure speaks of being able to "elect" to take the FMV that one uses to calculate taxes due the CRA, and make that the new basis for the properties for future US tax purposes. I looked for but did not find what happens if one doesn't want to do that - for my US tax purposes, a higher basis does not help me - my plan is for my kids to inherit the properties, which automatically will be at the then current FMV.

So...is there a way to get a credit on my US taxes for 2024 for what I will have to pay the CRA for deemed disposition of those properties?

Thank you.
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Deemed disposition of US rental condo

Post by nelsona »

If you do not "elect" to use the procedure, then your properties are treated as if nothing happened: you would ow tax upon sale with no regard to the Cdn deemed disposition.

However there is a rarely used provision (Article XIII(5) that would allow you to (a) post security for the tax on these properties, then (b) if you continue to hold these until 10 years have elapsed, have the deemed disposition ignored.

I would have a Cdn cross-border specialist guide you in this.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Post Reply