basis of property for capital gain if change in use

[shsamardar]

I am non resident of canada and live in USA. having a rental property in canada. Before starting renting the propoerty , I had the property as main residence.

Now that I am renting the property and starting depreciation of the property, I have to adjust the basis of the building to original cost PLUS half of appreciation in the price of building in the time I started renting ( rule of change of use ).

Is the basis of capital gain the same as basis for depreciation or different ?
if in future I am selling the property, what will be the basis of capital gain? original cost of building or the same depreciation formula that applies to basis of property at time for change of use?

Thanks

[nelsona]

Are we talking US tax or Cdn tax?

In canada, the cost basis for cap gains will be based either on market value the day you left, or a formula of total growth divided by the years it was your residence. CCA will be added to that calculation.

There is no change of use fro non-residents.

In US, for cap gains purposes, the gain will be determined from FMV when you left Canada: this is by treaty. Any depreciation will be added to it.

There was never any chnage of use for US purposes.

In both cases the depreciation will be based on the FMV when you left (on the house only, of course).

[shsamardar]

From CCRA website, I am finidng this about change of use.
http://www.cra-arc.gc.ca/tax/business/t ... nge-e.html

Are you saying this doesn't apply to non residents for depreciation? This is in the booklet of rental income statements CCRA mailed to me as well.

Is the basis of depreciation the same as basis for capiutal gain purposes? or they are different?

Regarding IRS, In website http://www.irs.gov/publications/p946/ch01.html#d0e1447

it says :
[color=red]Property changed from personal use. If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of the following.
The fair market value (FMV) of the property on the date of the change in use.

Your original cost or other basis adjusted as follows.

Increased by the cost of any permanent improvements or additions and other costs that must be added to basis.

Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis.[/color]

Does this calculation apply to bais for capital gains also?
Thanks

[nelsona]

all that you have shown me applies ONLY to depreciation (ie. determining what figure to use to start calcualting CCA/depreciation.

So, yes, the capital cost will be different than the FMV for Cdn purposes. My reference to change iof use not applying was incorrect. I was thinking of the 4-year rule.

Your capital gains has been already expaianed to you. you will have a choice. All you will need to do is add whatever CCA you took to the lower figure you come up with, when you sell.

For US, you will have to use FMV on the day you left, since that is when you became taxable in US. So, in US, your cost basis , your FMV on the day you left and your depreciable basis are all the same.

How's it going in finding out your FMV when you left canada. See why I stress this?

[shsamardar]

Thanks Nelsona

From IRS website for change of use, I copied below, plese notice word LESSER

Since I am in USA, I haven't changed the usage. it has always been rental since I am in USA.
therefore below relates to date I came to USA.
"The fair market value (FMV) of the property on the date of the change in use. "

but
for this part, "Your original cost or other basis adjusted as follows.
", Is this my very original cost I paid for house two years before I came to
USA?



[color=brown]
[b]If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the LESSER of the following.
The fair market value (FMV) of the property on the date of the change in use.

Your original cost or other basis adjusted as follows.

Increased by the cost of any permanent improvements or additions and other costs that must be added to basis.

Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis.[/color[/b]] [/color]

[nelsona]

I read what you said. Since your house was your principal residence in canada, the treaty treats it differently. Go with FMV.

[shsamardar]

You mentioned " I was thinking of the 4-year rule. "


Does that rule apply to non residents?

Thanks Nelsona

[nelsona]

No.

[shsamardar]

Ok. I started depreciation of my canada property in USA last yesr, 2005.
I did that based on original cost.

Now that you are advising that it needs to be based on FMV of the time I became non residence ( also the same time change of use as well ) , I have ot adjust that tax return.

If My FMV is of the date of chage of use is greater than originla cost, will I get benefit of that when I am selling it?

If this is only becasue of tax treaty between Canada nad USA, How do I have to declare that in the tax return?

I found this link that talks about tax treaty between USA and Canada but too complex, any specific paragraph, I have to refer them to tell them my cost for depreciation and also capital gain is FMV of change of residency.

I found this paragraph but don't know is this exactly what is in your mind:
Article XIII
6. Where an individual (other than a citizen of the United States) who was a resident of Canada became a resident of the United States, in determining his liability to United States taxation in respect of any gain from the alienation of a principal residence in Canada owned by him at the time he ceased to be a resident of Canada, the adjusted basis of such property shall be no less than its fair market value at that time


Is it worth to take the pain and file an amendment for USA tax 2005?

Thanks Nelsona for your great help.


PS. Also For FMV, I have assessment ofpropoerty received every year that propoerty tax is based on that assessment. I will use that as finding the FMV as value in the date of change of use. Fair enough? or not acceptable?

[nelsona]

Obviously, if you have started depreciation with one term, it doesn't much matter at this point. IRS will get its share. It really doesn't matter, Sticlk with what you started with.

You will only report cap gains when you sell. Come back then.

Meanwhile focus on finishing your return, and getting a reliable FMV from Canada.

[shsamardar]

You said
"Obviously, if you have started depreciation with one term, it doesn't much matter at this point. IRS will get its share. It really doesn't matter, Sticlk with what you started with. "

If I want to change it, I have to amend only last year and that's all. for this, I haven't sent yet. Can I change the base for depreciation by sending an amendment . Is it worth doing that?

You said:
"
You will only report cap gains when you sell. Come back then.
"

If I stick with what I have done and that is depreciating based on orignal cost and not FMV of the time of change of use , for capital gain in future can I use FMV of the change of use for basis of cost or no, these two have to be the same? what is the best approach ?


Thank you Nelsona

[nelsona]

I think we have covered everything. The questions are getting circular.

See you all in May.