Hi,
I am a US citizen. Moved to Canada in August 2010, got PR in 2011 and left Canada in June 2015. During my stay in Canada, I purchase a rental property in California. My question is for 2015 when I left Canada permanently, do I have to file T1163 and T1243 for this US rental property?
I will continue to rent it out in the foreseeable future. Therefore, the based will be depreciated on the US tax return. Another question is when I sell the property in the future, how do I calculate the gain if I already paid tax on the deemed disposition in 2015? Do I need to adjust the cost of the property on US tax return?
Any advise is greatly appreciated.
Canadian Exit Tax
Moderator: Mark T Serbinski CA CPA
Your foreign property is subject to deemed disposition when you left Canada, so you will owe departure tax on its gained value.
The treaty allows you (in fact, insists) to pretend you sold your condo, so that you can get the tax credit for the Cdn taxes you are going to pay for 2015.
Going forward, you will start fresh with the new cost basis. You would continue to depreciate at the rate you have in the past.
The treaty allows you (in fact, insists) to pretend you sold your condo, so that you can get the tax credit for the Cdn taxes you are going to pay for 2015.
Going forward, you will start fresh with the new cost basis. You would continue to depreciate at the rate you have in the past.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Thanks! Just to clarify. Only the property that I purchased after I moved to Canada would be subject to the exit tax since I was there less than five years, right? Say if I have another condo that was purchased before I moved to Canada. It is not subject to the exit tax, right?
Also how do I get a fresh start on the new cost basis? What forms do I need to file for 2015?
[quote="nelsona"]Your foreign property is subject to deemed disposition when you left Canada, so you will owe departure tax on its gained value.
The treaty allows you (in fact, insists) to pretend you sold your condo, so that you can get the tax credit for the Cdn taxes you are going to pay for 2015.
Going forward, you will start fresh with the new cost basis. You would continue to depreciate at the rate you have in the past.[/quote]
Also how do I get a fresh start on the new cost basis? What forms do I need to file for 2015?
[quote="nelsona"]Your foreign property is subject to deemed disposition when you left Canada, so you will owe departure tax on its gained value.
The treaty allows you (in fact, insists) to pretend you sold your condo, so that you can get the tax credit for the Cdn taxes you are going to pay for 2015.
Going forward, you will start fresh with the new cost basis. You would continue to depreciate at the rate you have in the past.[/quote]
Correct on what is subject to deemed disposition.
For reporting the deemd sale on your US return, look at IRS Rev Proc 2010-19. Section 4.01 applies to US real estate.
For reporting the deemd sale on your US return, look at IRS Rev Proc 2010-19. Section 4.01 applies to US real estate.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
So for my 1040, I will report a sale of the rental on the date I left canada and immediately repurchase the condo at the FMV. I will also exclude the gains on deemed sales pursuant to Rev. Proc. 2010-19. Does this sound right to you?
As for the California 540 NR. The deemed sale and repurchase should not be reported at all. So there will be a difference in cost basis between federal and california going forward?
[quote="nelsona"]Note that this only works for IRS. You still have to wait until you sell, to pay California tax, on the entire profit.[/quote]
As for the California 540 NR. The deemed sale and repurchase should not be reported at all. So there will be a difference in cost basis between federal and california going forward?
[quote="nelsona"]Note that this only works for IRS. You still have to wait until you sell, to pay California tax, on the entire profit.[/quote]
No, you should report the deemed dispositions and pay tax, especially on winners, as has always been the case for US citizens, using the deemed disposition value as the proceeds, thus resetting the cost basis for future 'real' disposition. You want to use the cap gains tax from the deemed dispositions this year (although they can be carried forward).
Rev proc 2010-19 really was meant to clarify what non-US citizens should do; I merely pointed the rev. proc because explains what has always been available to US citizens, and the specifics on 4.01 applied to your California property.
You would report the deemed sales, an attach an 8833 explaining the deemed disposition and the new cost basis, etc, much as outlined in the Rev Proc.
Technically, you are not using the Rev proc, so you are not bound by the requirement in the rev proc to apply it to ALL your deemed disposed investments. You would choose to apply it for "winners", to increase their cost basis, but could simply ignore the deemed dispo for any "losers" that you have, keeping their 'original' adjusted cost basis.
Rev proc 2010-19 really was meant to clarify what non-US citizens should do; I merely pointed the rev. proc because explains what has always been available to US citizens, and the specifics on 4.01 applied to your California property.
You would report the deemed sales, an attach an 8833 explaining the deemed disposition and the new cost basis, etc, much as outlined in the Rev Proc.
Technically, you are not using the Rev proc, so you are not bound by the requirement in the rev proc to apply it to ALL your deemed disposed investments. You would choose to apply it for "winners", to increase their cost basis, but could simply ignore the deemed dispo for any "losers" that you have, keeping their 'original' adjusted cost basis.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Thank you for the detailed reply.
By "report deemed dispositions and pay tax", you mean pay Canadian tax, right? I will report the deemed disposition on 1040 too. But if there is no offsetting, I will be double taxed. I am just wondering how the offsetting is done on the federal return. Is it through 1116?
[quote="nelsona"]No, you should report the deemed dispositions and pay tax, especially on winners, as has always been the case for US citizens, using the deemed disposition value as the proceeds, thus resetting the cost basis for future 'real' disposition. You want to use the cap gains tax from the deemed dispositions this year (although they can be carried forward).
Rev proc 2010-19 really was meant to clarify what non-US citizens should do; I merely pointed the rev. proc because explains what has always been available to US citizens, and the specifics on 4.01 applied to your California property.
You would report the deemed sales, an attach an 8833 explaining the deemed disposition and the new cost basis, etc, much as outlined in the Rev Proc.
Technically, you are not using the Rev proc, so you are not bound by the requirement in the rev proc to apply it to ALL your deemed disposed investments. You would choose to apply it for "winners", to increase their cost basis, but could simply ignore the deemed dispo for any "losers" that you have, keeping their 'original' adjusted cost basis.[/quote]
By "report deemed dispositions and pay tax", you mean pay Canadian tax, right? I will report the deemed disposition on 1040 too. But if there is no offsetting, I will be double taxed. I am just wondering how the offsetting is done on the federal return. Is it through 1116?
[quote="nelsona"]No, you should report the deemed dispositions and pay tax, especially on winners, as has always been the case for US citizens, using the deemed disposition value as the proceeds, thus resetting the cost basis for future 'real' disposition. You want to use the cap gains tax from the deemed dispositions this year (although they can be carried forward).
Rev proc 2010-19 really was meant to clarify what non-US citizens should do; I merely pointed the rev. proc because explains what has always been available to US citizens, and the specifics on 4.01 applied to your California property.
You would report the deemed sales, an attach an 8833 explaining the deemed disposition and the new cost basis, etc, much as outlined in the Rev Proc.
Technically, you are not using the Rev proc, so you are not bound by the requirement in the rev proc to apply it to ALL your deemed disposed investments. You would choose to apply it for "winners", to increase their cost basis, but could simply ignore the deemed dispo for any "losers" that you have, keeping their 'original' adjusted cost basis.[/quote]
I am always discussing your 1040. What needs to be done on Cdn exit return is already eastablished, you have no choice.
So, you should report any deemed dispositions on your 1040 as well, so that you get the tax credit.
The tax credit comes from 1116. It will no doubt be passive income. You are not "offsetting the gain", you are reporting the gain (sched D) and then getting credit for the Cdn tax you paid against the US tax you owe.
I somehow think that your condo deemed disposition is going to be very highly taxed in Canada, given when you bought it (in C$) and when you deemed sold it (in C$) and the fact that it is in California. So it is very important that you get credit for this Cdn tax on your return, along with the Cdn tax you paid on any other deemed disposed property.
So, you should report any deemed dispositions on your 1040 as well, so that you get the tax credit.
The tax credit comes from 1116. It will no doubt be passive income. You are not "offsetting the gain", you are reporting the gain (sched D) and then getting credit for the Cdn tax you paid against the US tax you owe.
I somehow think that your condo deemed disposition is going to be very highly taxed in Canada, given when you bought it (in C$) and when you deemed sold it (in C$) and the fact that it is in California. So it is very important that you get credit for this Cdn tax on your return, along with the Cdn tax you paid on any other deemed disposed property.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Just a quick correction on your California property.
For that property alone, the credit will come on the CANADIAN tax return, because US doesn't give up any tax money on US real estate. So, for that property alone, you need to get the money back from US, and you can only get it back in Canada.
For your other investements, since they are considered Cdn sourced by virtue of the fact you lived in Canada, the normal passive income 1116 works.
For that property alone, the credit will come on the CANADIAN tax return, because US doesn't give up any tax money on US real estate. So, for that property alone, you need to get the money back from US, and you can only get it back in Canada.
For your other investements, since they are considered Cdn sourced by virtue of the fact you lived in Canada, the normal passive income 1116 works.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Since you will have now foreign tax credits on both returns, just a piece of info.
ALWAYS determine your taxes on both returns first WITHOUT any FTC. use that tax result to determine the tax available or eligible for FTC consideration. Then apply foreign tax credit ONE TIME to each return. Don't get into "iterating" one return based on the FTC on the other return.
ALWAYS determine your taxes on both returns first WITHOUT any FTC. use that tax result to determine the tax available or eligible for FTC consideration. Then apply foreign tax credit ONE TIME to each return. Don't get into "iterating" one return based on the FTC on the other return.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best