US GC with a Canadian property

Aichu · Post by **Aichu** » Wed Mar 21, 2012 4:51 pm

Owned a principal residence in Cnd since 2002 and relocated to US in 2006 and rented out the house. We are now planning to move back to Cnd but maintain our GC status and live in the house at least 2 yrs before buying a new house. Will my cap gain be 100% excluded from US income tax? Do I have a nonqualified use here?

nelsona · Post by **nelsona** » Wed Mar 21, 2012 6:16 pm

you will need to at least recapture the depreciation. You will probably owe some cap gains for the rental period. You can look that up.

Of course, about a third of the cap gain will be taxable in canada, so your US tax should not be much of a worry to you.

nelsona · Post by **nelsona** » Wed Mar 21, 2012 6:19 pm

also, if your home was in toraonto, it likely has more than $500K cap gains anyways (when you do the two currency conversions), which would make the excess taxable in US.

JGCA · Post by **JGCA** » Wed Mar 21, 2012 6:23 pm

If you lived in the home for 2 yrs out of the last 5 yrs prior to date of sale you can exclude up to $ 250K ( $500K if file jointly) of the gain on the sale, and if you qualify and the gain is excluded you do not have to report the sale. If you are over this amount or do not qualify then its reportable under normal IRS rules. Under treaty treatment your cost is the FMW when you entered US not the original cost of 2002. Since you were renting out the place you may find that not all the gain in Canada is exempt also you need to do the number of yrs as the principle residence + 1 over the total yrs owned up to yr of sale * gain to see what is excluded.

nelsona · Post by **nelsona** » Wed Mar 21, 2012 6:50 pm

I do believe that any time you rent, you do have to recapture depreciation, even if you later qualify for the exemption.

JGCA · Post by **JGCA** » Wed Mar 21, 2012 7:01 pm

You are correct because unlike Canada the IRS forces one to claim depreciation which is not covered by the exemption as you say.

Aichu · Post by **Aichu** » Thu Mar 22, 2012 12:56 am

Thanks for the responses.

Lastly, does this amendment have any impact on my situation?

"The Housing and Economic Recovery Act of 2008 amends Section 121 of the Internal Revenue Code.Â Section 121 no longer permits homeowners to take the full tax-free exclusion on the sale of real property that was held and used as their primary residence if there was any non-qualified use of the real property prior to it being held and used as their primary residence."

nelsona · Post by **nelsona** » Thu Mar 22, 2012 6:07 am

Yes it does,

Aichu · Post by **Aichu** » Thu Mar 22, 2012 4:09 pm

So, does this mean that if I sell the property in 2014, 6 (2007 - 2012 rented out portion) / 12 (2002 - 2014 ownership) or 50% of the capital gain is taxable?

JGCA · Post by **JGCA** » Thu Mar 22, 2012 4:52 pm

YES, you exclude the number of years ( or days actually) that it was rented over from the exemption. This is not a crossborder issue its a domestic calculation the only treaty amount you use here is the FMW cost not the original cost of 2002 of when you became a US resident.

JGCA · Post by **JGCA** » Thu Mar 22, 2012 5:04 pm

An interesting note here is the fact that you are CND resident paying some tax now on your Principle residence due to renting it out, and also paying tax now to the IRS due to renting it out also, any tax you pay now to Canada can we claim it back in the US as a foreign tax since they are taxing the same property, I seem to think so! But not the tax paid on recapture since you never claimed any in Canada.

nelsona · Post by **nelsona** » Thu Mar 22, 2012 5:18 pm

JG, there is never any need to specifically tie Cdn tax paid on a specific income item to the US tax paid on a specific income item.

In this case, the sale of the house is generating XX capital gains on his US tax return including recapture (all Cdn sourced). He would use this figure on 1116 to determine his limitations.

You can look at it another way, the depreciation reduced his Cdn-source income all these years, thus reducing his foreign tax credit, now is the time toe recapture the credit, at the same time the depreciation is being recaptured.

It is the same as bank interest in canada. While he may pay no tax in canada, he does report the passive income on his US return, and is quite free to include this passive income together with any other Cdn-sourced passive income, and determine his tax credit from this. He is merely limited to the tax paid or accrued AS A WHOLE for the category, not item by item.

Aichu · Post by **Aichu** » Thu Mar 22, 2012 5:22 pm

Is there a way to claim 100% exemption on US capital gain other than giving up GC status?

Aichu · Post by **Aichu** » Thu Mar 22, 2012 5:47 pm

JGCA, when you say that the it's not a crossborder but a domestic calculation, are you saying that the since my property is in cnd this amendment (HERA 2008) does not apply to my concern on US cap gain? Sorry if I kinda slow in understanding this. By the way, I was not able to apply (to irsin 2007) to enable me to use FMV at the time of moving to US so I am required to use the 2002 orig cost in calculating my cap gain.

JGCA · Post by **JGCA** » Thu Mar 22, 2012 6:55 pm

No the amendment certainly applies, its calculated as to the time it was used as a primary residence less teh time it was rented out to determine teh capital gain. All I said was that the time you came to teh US that was your cost not the original of 2002 that is due to treaty. You can still use teh FMW of teh time you arrived if there is a way for you to check this the land regisrty bureau can be of help.

On the point made of the income not being matched but grouped so the cap gain and the recapture will be catagorized as CND source I see this is the right way to do it thanks Nelsona