Deemed disposition of US rental condo

[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]

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.

[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]

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.

[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]

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

[Ulipetovay]

Typically, the cost basis for calculating capital gains tax is the original purchase price plus any improvements made to the property.

[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]

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]

@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]

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.