Hello,
After reading many posts, I’m still not sure if my understanding is correct.
When you leave Canada owning a Canadian principal residence at the time of your departure, you (a Canadian citizen only) will have a natural step-up of basis to FMV at the time of departure without reporting any other treaty positions (no form 8833 is needed).
Later, you begin to rent your principal residence.
When you report your rental income to the IRS, you use the stepped-up value to calculate depreciation.
If the moment of change-in-use occurs the year after your departure, is it possible to add to your tax return form 8833 to step-up the value of your rental at the moment of the change-in-use – article XIII (7)?
When I read the treaty, it seems possible, especially when the treaty uses words “at any time”. When I read IRS explanations, they talk only about deemed dispositions upon departure and departure tax. Do they just omit other scenarios because they are not common?
In some cases, it may be interesting to declare “change-in-use” on the Canadian side to crystallize the value of your property and it would be easier to use the same adjusted basis on both sides of the border while reporting your rental income. It would also be possible to use the appraisal made for CRA, at the time of change-in-use, on the US side, instead of paying for another appraisal at the date of departure from Canada.
All the suggestions are greatly appreciated, as always.
Step-up for rental and article XIII (7) of the treaty “at any time”
Moderator: Mark T Serbinski CA CPA
Re: Step-up for rental and article XIII (7) of the treaty “at any time”
If you change the use of your former principal residence to a rental at some point after your move, you would only be able to step up the ACB for IRS purposes, if you also filed for change of use in Canada. Otherwise you have not met the requirement of XIII(7), in that there would be no "deemed" sale in Canada's eyes. Otherwise the ACB would be determined at the time of the move, by applying XIII(6).
A new Canadian FMV appraisal would be wise, and would serve in both countries.
A new Canadian FMV appraisal would be wise, and would serve in both countries.
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
Re: Step-up for rental and article XIII (7) of the treaty “at any time”
Thank you very much!
Yes, I also noticed that the change-in-use must be declared on the Canadian side to make things work for the IRS, thank you very much for confirming.
If your change-in-use occurs sometime after your departure from Canada, the election XIII (7) will step-up the basis of your rental property and you'll use the same appraisal on both side of the border (deemed disposition for Canada, step-up for the USA)
If your change-in-use occurs at the time of your departure, you just don't need any election if you're Canadian only - XIII (6) will work automatically. Do I still disclose to the IRS why my basis for depreciation of my rental is different from the original value? Or do I just use my new appraisal without any concerns as if this is the original price?
If your change-in-use occurs some days before the departure, to be on the safe side, is it still a good idea to use the election XIII (7) to avoid any potential refusal by the IRS to treat your Canadian residence as a principal residence? I remember you told me that this situation was murky and it was difficult to predict if the IRS would still consider your Canadian home as your residence or a rental. So, maybe this election will help rectify the situation?
Form 8833 asks to list the Internal Revenue Code provisions modified by the treaty-based return position; do I have to look for the exact provision or other explanations you provide in this form will be sufficient?
I was ready to depreciate according to the IRS rules (27.5 years) but accidently came across a 30-year period for foreign properties. Is there any IRS publication reserved specifically for foreign properties or this was the only exception?
Thank you gain for your help,
Yes, I also noticed that the change-in-use must be declared on the Canadian side to make things work for the IRS, thank you very much for confirming.
If your change-in-use occurs sometime after your departure from Canada, the election XIII (7) will step-up the basis of your rental property and you'll use the same appraisal on both side of the border (deemed disposition for Canada, step-up for the USA)
If your change-in-use occurs at the time of your departure, you just don't need any election if you're Canadian only - XIII (6) will work automatically. Do I still disclose to the IRS why my basis for depreciation of my rental is different from the original value? Or do I just use my new appraisal without any concerns as if this is the original price?
If your change-in-use occurs some days before the departure, to be on the safe side, is it still a good idea to use the election XIII (7) to avoid any potential refusal by the IRS to treat your Canadian residence as a principal residence? I remember you told me that this situation was murky and it was difficult to predict if the IRS would still consider your Canadian home as your residence or a rental. So, maybe this election will help rectify the situation?
Form 8833 asks to list the Internal Revenue Code provisions modified by the treaty-based return position; do I have to look for the exact provision or other explanations you provide in this form will be sufficient?
I was ready to depreciate according to the IRS rules (27.5 years) but accidently came across a 30-year period for foreign properties. Is there any IRS publication reserved specifically for foreign properties or this was the only exception?
Thank you gain for your help,
Re: Step-up for rental and article XIII (7) of the treaty “at any time”
I use 8833 to explain any treaty position I take, regardless of whether it is mandatory or not, and do not list any specific IRS code. Just keeps them from guessing.
Since you said we've discussed these issues before, I''ll leave it as that.
Since you said we've discussed these issues before, I''ll leave it as that.
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
Re: Step-up for rental and article XIII (7) of the treaty “at any time”
Thank you very much, it will definitely save my time not to look for a specific IRS rule.
It's a smart decision to include form 8833 for any treaty position just to avoid guessing in what case its use is mandatory.
It's a smart decision to include form 8833 for any treaty position just to avoid guessing in what case its use is mandatory.
Re: Step-up for rental and article XIII (7) of the treaty “at any time”
I've been trying to find an IRS publication on how to depreciate a foreign property. It most probably doesn't exist. While looking, I came across a reference to section 168 of the IRS tax code. When I looked at this section, it seemed not exactly something I looked for because of the way the information is laid out. Actually, it was exactly what I needed.
Section 168 (g) not only explains the ADS (alternative depreciation system) but also precises the types of properties where ADS is mandatory: Section 168 (g) (1) (A) any tangible property which during the taxable year is used predominantly outside the United States.
So, after reading the same section, we can say that a residential rental property will be depreciated for 30 years using ADS with the mid-month convention when possible.
Section 168 (g) not only explains the ADS (alternative depreciation system) but also precises the types of properties where ADS is mandatory: Section 168 (g) (1) (A) any tangible property which during the taxable year is used predominantly outside the United States.
So, after reading the same section, we can say that a residential rental property will be depreciated for 30 years using ADS with the mid-month convention when possible.
Re: Step-up for rental and article XIII (7) of the treaty “at any time”
Hello,
Sharing more details about form 8833 for mandatory disclosures of treaty-based positions. (still for a rental basis of a Canadian residence)
Just a look at this form and a talk with chatGPT that gave several non-correct answers, made me check the regulations on the requirement to file or not to file f8833. It seems that there's a waiver if the annual impact (difference between the historic value of the Canadian residence and FMV on the arrival in the US) is less than 10 000. The most important word is annual. So, only if the difference between these two basis (historic and step-up) is more than 300 000 USD, which will have an annual impact on your taxes of more than 10 000 USD (depreciation calculations), form 8833 will become mandatory. (301 000/30 = 10 033 per year). While I'm not a partisan of conservative approaches for time-consuming reasons, I prefer to stay careful especially when a penalty for non-disclosing is 10 000. But when it's clearly not mandatory, is there any benefit to fill the form? Is it clearly non-mandatory?
(2) Reporting is waived for an individual if payments or income items otherwise reportable under this section (other than by reason of paragraph (b)(8) of this section), received by the individual during the course of the taxable year do not exceed $10,000 in the aggregate or, in the case of payments or income items reportable only by reason of paragraph (b)(8) of this section, do not exceed $100,000 in the aggregate.
All the comments on this will be highly appreciated!
Sharing more details about form 8833 for mandatory disclosures of treaty-based positions. (still for a rental basis of a Canadian residence)
Just a look at this form and a talk with chatGPT that gave several non-correct answers, made me check the regulations on the requirement to file or not to file f8833. It seems that there's a waiver if the annual impact (difference between the historic value of the Canadian residence and FMV on the arrival in the US) is less than 10 000. The most important word is annual. So, only if the difference between these two basis (historic and step-up) is more than 300 000 USD, which will have an annual impact on your taxes of more than 10 000 USD (depreciation calculations), form 8833 will become mandatory. (301 000/30 = 10 033 per year). While I'm not a partisan of conservative approaches for time-consuming reasons, I prefer to stay careful especially when a penalty for non-disclosing is 10 000. But when it's clearly not mandatory, is there any benefit to fill the form? Is it clearly non-mandatory?
(2) Reporting is waived for an individual if payments or income items otherwise reportable under this section (other than by reason of paragraph (b)(8) of this section), received by the individual during the course of the taxable year do not exceed $10,000 in the aggregate or, in the case of payments or income items reportable only by reason of paragraph (b)(8) of this section, do not exceed $100,000 in the aggregate.
All the comments on this will be highly appreciated!
Re: Step-up for rental and article XIII (7) of the treaty “at any time”
To adjust:
It’s even more interesting when annual amount x your marginal rate
• FMV Step-up Difference: $300,000
• Annual Difference: $300,000 ÷ 30 = $10,000
• If your marginal tax rate = 24% → Tax saved = $10,000 × 24% = $2,400
Since $2,400 < $10,000 → 8833 not required.
You don’t just compare the annual depreciation difference to $10k.
You compare the tax benefit from that difference (depreciation × tax rate) to $10k.
It’s even more interesting when annual amount x your marginal rate
• FMV Step-up Difference: $300,000
• Annual Difference: $300,000 ÷ 30 = $10,000
• If your marginal tax rate = 24% → Tax saved = $10,000 × 24% = $2,400
Since $2,400 < $10,000 → 8833 not required.
You don’t just compare the annual depreciation difference to $10k.
You compare the tax benefit from that difference (depreciation × tax rate) to $10k.
Re: Step-up for rental and article XIII (7) of the treaty “at any time”
After double-checking, the previous post doesn't seem accurate, we don't multiply annual difference in depreciation by tax rate:
To adjust:
It’s even more interesting when annual amount x your marginal rate
• FMV Step-up Difference: $300,000
• Annual Difference: $300,000 ÷ 30 = $10,000
• If your marginal tax rate = 24% → Tax saved = $10,000 × 24% = $2,400
Since $2,400 < $10,000 → 8833 not required.
You don’t just compare the annual depreciation difference to $10k.
You compare the tax benefit from that difference (depreciation × tax rate) to $10k.
To adjust:
It’s even more interesting when annual amount x your marginal rate
• FMV Step-up Difference: $300,000
• Annual Difference: $300,000 ÷ 30 = $10,000
• If your marginal tax rate = 24% → Tax saved = $10,000 × 24% = $2,400
Since $2,400 < $10,000 → 8833 not required.
You don’t just compare the annual depreciation difference to $10k.
You compare the tax benefit from that difference (depreciation × tax rate) to $10k.