Capital gain from selling principal residence and foreign tax credit
Moderator: Mark T Serbinski CA CPA
Capital gain from selling principal residence and foreign tax credit
Does long-term capital gain from selling Canadian principal residence (not taxed in Canada) affect how Canadian tax is apportioned between different income categories for foreign tax credit in US tax return?
Here is a simplified situation (dual citizen): Suppose that the l.t. capital gain from selling Canadian principal residence is X (after subtracting the appropriate exclusion amount), and suppose that all other income is general category income with net value also X (for simplicity). Suppose that Canadian tax is Y. Should then the full amount of Canadian tax Y be allocated to the general income category, or should it be split equally between passive and general categories?
Here is a simplified situation (dual citizen): Suppose that the l.t. capital gain from selling Canadian principal residence is X (after subtracting the appropriate exclusion amount), and suppose that all other income is general category income with net value also X (for simplicity). Suppose that Canadian tax is Y. Should then the full amount of Canadian tax Y be allocated to the general income category, or should it be split equally between passive and general categories?
Re: Capital gain from selling principal residence and foreign tax credit
The foreign tax is attributed to the type of income.
So US taxpayers living in canada can only use Cdn tax from passive income against the US tax arising from this sale.
So US taxpayers living in canada can only use Cdn tax from passive income against the US tax arising from this sale.
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Re: Capital gain from selling principal residence and foreign tax credit
If there are no foreign taxes on passive income, should the capital gain from selling Canadian principal residence still be included in passive category form 1116? Or it should be simply omitted from this form?
If the capital gain is 700K USD and the exclusion for married filing jointly is 500K, what should be used in line 1a (gross income from the category) of form 1116: 200K or 700K (with appropriate adjustment coefficient)?
I am using Turbo Tax, and if I include the capital gain in passive form 1116, the overall US tax due becomes much lower even though I did not have foreign taxes on passive income. Somehow this increases the available foreign tax credit for the general income category. I cannot explain that.
If the capital gain is 700K USD and the exclusion for married filing jointly is 500K, what should be used in line 1a (gross income from the category) of form 1116: 200K or 700K (with appropriate adjustment coefficient)?
I am using Turbo Tax, and if I include the capital gain in passive form 1116, the overall US tax due becomes much lower even though I did not have foreign taxes on passive income. Somehow this increases the available foreign tax credit for the general income category. I cannot explain that.
Re: Capital gain from selling principal residence and foreign tax credit
You should always report your foreign income on 1116 even if you have no tax assocaited with it (either because you have no Cdn tax, or no US tax) as this establishes the right to carryBACK (one year) or carryforward (10 years),
Proceeds is not income, the gain is, so it would be 200K.
How your software works is beyond my scope obviously. You would need to look at what exactly changes between the two versions It should not cross foreign tax to different categories. Your general 1116 should be unaffected by the passive, since the general income you report on your 1040 and the CDn tax associated with it do not change.
Proceeds is not income, the gain is, so it would be 200K.
How your software works is beyond my scope obviously. You would need to look at what exactly changes between the two versions It should not cross foreign tax to different categories. Your general 1116 should be unaffected by the passive, since the general income you report on your 1040 and the CDn tax associated with it do not change.
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Re: Capital gain from selling principal residence and foreign tax credit
When I add the passive 1116 for the sale of house, even though there is no Canadian tax on passive income, line 18 in the general category 1116 gets strongly reduced as apparently this entry is now computed taking into account the adjustment coefficient for long term capital gains (not sure why it is related with passive 1116). This results in an increase of the relative weight of the general income category (line 19) and therefore in an increase of the foreign tax credit available in the general category. I double-checked this with the previous year's version of the Turbo Tax software, it is consistent, so it is less likely to be just a software bug.
Not sure how to explain this...
Not sure how to explain this...
Re: Capital gain from selling principal residence and foreign tax credit
that actually does make sense.
I would just go back to 1040 Schedule D and make sure that is reporting correctly (ie. the log-term gain worksheet has been completed) and if it is, then trust the software.
I would just go back to 1040 Schedule D and make sure that is reporting correctly (ie. the log-term gain worksheet has been completed) and if it is, then trust the software.
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Re: Capital gain from selling principal residence and foreign tax credit
Is there any way the US tax paid on the Cdn residence sold be claimed as FTC on T1 in spite of Canada exempting principle residence sale from taxation? Assume T1 reported ordinary income and capital gains.
Let's say house sold for 1,000,000 and TOTAL including all other income was 1,500,000 and let's say one included two T1 line entries - one for 1,000,000 and another for (1,000,000) and then 1,000,000/1,500,000 X US TAX PAID = FTC. This is just hypothesizing how practically to manifest the FTC should someone have a 'yes' answer, but the real focus here is the Y/N question, not how anyway would one report it on FTC and come up with a claim number above zero.
Let's say house sold for 1,000,000 and TOTAL including all other income was 1,500,000 and let's say one included two T1 line entries - one for 1,000,000 and another for (1,000,000) and then 1,000,000/1,500,000 X US TAX PAID = FTC. This is just hypothesizing how practically to manifest the FTC should someone have a 'yes' answer, but the real focus here is the Y/N question, not how anyway would one report it on FTC and come up with a claim number above zero.
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Re: Capital gain from selling principal residence and foreign tax credit
I don't think so. You can only claim credits on the SAME income. Since it's not taxed in Canada, you can't use these credits to claim against other taxable income in Canada
Re: Capital gain from selling principal residence and foreign tax credit
Having thought about this for about 15 years (I have an American friend who has made about 1.2 mill on his PR), I can't think of any way. Nor have any cross-border accounting firms that I know of.
One cannot use the FTC rules, since their is NO FT to use. One cannot use the non-discrimination clause, as there is none,
One cannot use the Double tax elimnation article (ie. re-sourcing) since it is already foreign sourced.
Of course, any other passive income, and the CDn tax associated with it could be used, but would never bring actual relief from the US tax on the house itself.
Btw, foreign losses are to be included on the 1116 before taking any credit.
One cannot use the FTC rules, since their is NO FT to use. One cannot use the non-discrimination clause, as there is none,
One cannot use the Double tax elimnation article (ie. re-sourcing) since it is already foreign sourced.
Of course, any other passive income, and the CDn tax associated with it could be used, but would never bring actual relief from the US tax on the house itself.
Btw, foreign losses are to be included on the 1116 before taking any credit.
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Re: Capital gain from selling principal residence and foreign tax credit
Line 3e of form 1116 is "gross income from all sources".
If I had a capital gain of $X from the sale of my principal residence (and X < 500K, and I qualify for the exemption), does this $X get counted in Line 3e?
My understanding of the exemption from the IRS page is that this $X does not need to be mentioned anywhere on the tax return. I hope that this means that the $X$ does not contribute to Line 3e. Is this correct?
Thanks!
If I had a capital gain of $X from the sale of my principal residence (and X < 500K, and I qualify for the exemption), does this $X get counted in Line 3e?
My understanding of the exemption from the IRS page is that this $X does not need to be mentioned anywhere on the tax return. I hope that this means that the $X$ does not contribute to Line 3e. Is this correct?
Thanks!
Re: Capital gain from selling principal residence and foreign tax credit
the gross income referred to is the gross income from page 1 of the return, if there were no cap gains to report, it doesn't appear on 1116 either.
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