US and Canada Tax questions on sale of a US House

[Henry2279]

Hello, everyone! I would like to seek advice on how to file U.S. and Canada tax returns on the sale of a US house last year.

I am a Canadian who worked in the U.S. for seven years. During my time there, I purchased a property for living and working purposes. Simultaneously, I maintained a house in Canada where my family has lived for more than 20 years. The Canada’s house was never rented out, and we travelled back to Canada almost every vacation or weekend.

I am a U.S. non-resident in terms of tax returns and file taxes for both countries each year. My questions are:

1. Last year, I returned to Canada and sold the U.S. property for less than $500K, with a capital gain of less than $250K. As a U.S. non-resident, can I qualify for the principal residence exemption, similar to US residents, and not have to report the sale to the IRS for the 2023 Tax Return?

2. Do I need to report the property sale to the CRA for the 2023 Tax Return if not reporting to IRS? Can I have a primary residence in Canada and also claim the sale of the U.S. property as a primary residence since it was not for investment or vacation purposes?

Thanks in advance for any advices!

Henry

[nelsona]

I'm having trouble with the claim that you were a Cdn resident throughout this time, when you use terms like "worked in US for 7 years" and "returned to Canada and sold the US property".

Which is it. Did you live in US, or did you visit US?

[Henry2279]

I lived and worked in US from 2015 to 2023 with TN. I bought a house in US in 2016 and sold it in 2023. During the time I was in US I filed US tax return
as a non-resident and Canada tax return as a resident. I finished my work in US in September 2023 and returned back to Canada. Hope this is more clear.

[nelsona]

So, you reported ALL income in Canada, and US-only income in US on a 1040NR?

If so, you will owe tax on the full gain in US on your 1040NR. You can choose to claim the house was your Principal Residence on your Cdn return , or report the sale as taxable in Canada too. This will depend on whether you also have a property in Canada during that period.

What residential ties did you have in Canada all these years? CRA does not permit one that meets US resident test to remain resident in Canada for tax purposes, unless they have overwhelming ties in Canada, greater than in US -- even if you are willing to pay all Cdn taxes.

[nelsona]

Based on your original info, I would NOT claim the US home as your Principal residence on your Cdn return, as you will lose it for your Cdn home, and since you will pay US tax on the sale of the US home, and you can take credit for those taxes on your US home on your Cdn return.

So, the US home is treated like a cottage.

[Henry2279]

Thank you Nelsona for your advice, it is much appreciated!

For each year I claimed US-Canada tax treaty article IV to apply for a resident of Canada and nonresident of US for tax purposes using Form 8833, and using US income and tax paid in US as foreign income and foreign tax credit in my Canada tax return. It seems working for both IRS and CRA.

[Henry2279]

Good morning Nelsona, I have further questions hope you could help with?

1. Since I left US last September, should I file US tax this year as a Dual-Status Taxpayer? What is the tax implication to my Cdn return if I do so?
2. If I can file US tax as Dual-Status, can I qualify for Full/partial Exclusion of the capital gain of sale the house in US?
3. If I continue use 1040NR this year, can I still use Hypothetical Form 1040 to calculate my tax rate? - use Cdn address in 1040NR and US address in 1040?

Thank you much in advance!

[nelsona]

You should be filing 1040NR, as you should have each year. A 1040 implied filing world income. You have never been US resident, so why would you be dual-status?
2. No, it was not your residence, yoi do not meet the requirements for exclusion. besides, as I said, you will owe tax in canada on the sale, so you might as well in US too, and take credit in Canada

3. You are not dual status, You are non-resident, filing 1040NR. But you certainly can use the pro forma 1040 to determine your taxrate.

Btw for those following this thread, 8833 is not needed to prove non-residency of US, as 1040NR has sufficient space and questions to satisfy, Just a technical point.

[Henry2279]

Thank you again Nelsona for your advice, much appreciated!

I googled the web today and found a few tax professionals talking about nonresident alien may also be able to claim the exclusion of the real property sale. Here is the example from Christopherbyrne.com: (https://christopherbyrne.com/nonresiden ... %20returns.)

"Nonresident aliens may also take advantage of the exclusion. However, named nonresident aliens would each need to take their share of the principal residence exclusion amount on separate tax returns since nonresident aliens do not qualify to file joint returns. Practically, this means that if the gain on the sale was in excess of $250,000, each filer would need to 1) qualify to claim the principal residence exclusion on their own, and 2) file Form 1040NR U.S. Nonresident Alien Income Tax Return to claim their portion of the principal residence exclusion."

I am not sure if it is accurate, what is your opinion on this? Thanks!

[Henry2279]

Here is the Q&A from IRS

Answer 5: The exclusion of gain for the sale of a personal residence under IRC 121 may apply to NRAs when they sell their U.S. personal residence. Because NRAs cannot file joint returns unless they are married to U.S. persons, NRAs would need to take their own share of the principal residence exclusion amount on separate tax returns. Consequently, the maximum amount of excludable gain for NRAs that file Form 1040NR, U.S. Nonresident Alien, is $250,000. For the exclusion to apply, NRAs would have to meet the eligibility test required for the exclusion. To determine if a nonresident alien meets the Eligibility Test, you can review the five steps of the Eligibility Test in Publication 523, Selling Your Home, as well as review Topic No. 701, Sale of Your Home.

If an NRA qualifies to claim the IRC 121 exclusion, the statutory withholding under IRC 1445 on the amount realized from the sale could exceed the maximum tax liability on the sale. Therefore, an NRA may request a withholding certificate from the Internal Revenue Service to provide to the buyer. The withholding certificate would allow the buyer (through escrow/closing agent) to withhold tax at an approved reduced rate.

https://www.irs.gov/individuals/interna ... ithholding

[nelsona]

You aren't getting it. The US was was never your principal residence. Your Cdn home is.

And even if you could *somehow* claim it was (nothing in the quotes you presented would indicate this), you will still owe Canadian taxes on the sale, since your residence is in Canada.

So why present a false claim for your your US home (and expose yourself to other US taxes, as you would need to file a 1040) when any US tax you might save, will simply be taken by CRA. And if you try to use the US home as your PR for CDn purposes, you will lose it for your current CDn home.

[nelsona]

The quotes you are reading are for someone LIVING in US, and the spouse is living elswhere. You don't live in US and have never claimed to.

[FunTopic]

There's no other way to put this: You filed multiple 1040NR's, every year. NR = "NON-RESIDENT."

By your own admission, you're a non-resident for US purposes.

Separately, you need to crunch the numbers on whether it's beneficial to claim Principal Residence Exemption for Canadian purposes, when you'll owe US tax on the sale of the property. By taking the PRE, you lose the ability to claim the FTC on the US tax paid. This might be a bad option to take, depending on the size of the capital gain etc.

Henry2279 wrote:
> Here is the Q&A from IRS
>
> Answer 5: The exclusion of gain for the sale of a personal residence under
> IRC 121 may apply to NRAs when they sell their U.S. personal residence.
> Because NRAs cannot file joint returns unless they are married to U.S.
> persons, NRAs would need to take their own share of the principal residence
> exclusion amount on separate tax returns. Consequently, the maximum amount
> of excludable gain for NRAs that file Form 1040NR, U.S. Nonresident Alien,
> is $250,000. For the exclusion to apply, NRAs would have to meet the
> eligibility test required for the exclusion. To determine if a nonresident
> alien meets the Eligibility Test, you can review the five steps of the
> Eligibility Test in Publication 523, Selling Your Home, as well as review
> Topic No. 701, Sale of Your Home.
>
> If an NRA qualifies to claim the IRC 121 exclusion, the statutory
> withholding under IRC 1445 on the amount realized from the sale could
> exceed the maximum tax liability on the sale. Therefore, an NRA may request
> a withholding certificate from the Internal Revenue Service to provide to
> the buyer. The withholding certificate would allow the buyer (through
> escrow/closing agent) to withhold tax at an approved reduced rate.
>
> https://www.irs.gov/individuals/interna ... ithholding

[ND]

"can I qualify for the principal residence exemption, similar to US residents, and not have to report the sale to the IRS for the 2023 Tax Return?' There is a false premise embedded in this question. When US property is sold, Form 1099-S is filed with IRS and when claiming PRE, the sale, gain and exemption MUST be reported on 1040 and of course where eligible, PRE claimed. In contrast many other income exclusions in IRC need not be reported at all including sales of Cdn PR by USCs where exemption exceeds gain.