Dual citizen, Canadian home. Started as a rental & USA resident, ends as principal residence as a Canadian resident.

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Gilgamesh
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Joined: Tue Apr 02, 2019 5:30 pm

Dual citizen, Canadian home. Started as a rental & USA resident, ends as principal residence as a Canadian resident.

Post by Gilgamesh » Sat Apr 13, 2019 11:28 am

Is the following accurate? Also, bunch of questions.

Phase 1: Dual citizen purchasing a Canadian home and renting it as a USA resident.
Phase 2: Then 4-5 years later stop renting it but remain USA resident.
Phase 3: 8-10 years after that, home becomes the principal residence and we become Canadian resident.
Phase4: sell home

Phase 1 (Dual citizen, US resident...renting home):
CRA:
25% of the gross rent will be withheld by CRA every month. Then at tax time you get NR4 and file S.216 to show 22.2% (within a certain net income) taxes only on net income and get the rest back.
File T1161: report fair market value.

IRS: In 1040 pay taxes (state tax, if any) on rental income. Schedule E. I will get partial credit for any Canadian taxes paid via 1116 . I do not report in FBAR or 8938.
[b]QUESTION: How to calculate exactly how much credit I will get? Also, I would think I can deduct expenses that could be deducted for Canada with IRS as well. On top of the typical Canadian expenses, USA allows to deduct depreciation. Therefore even with the partial credit for Canadian taxes, shouldn’t USA taxes be none to negligible?[/b]

Phase 2 (USA resident, not renting Canadian home):
CRA: [b]QUESTION Do I only file T1161?[/b]

[b]IRS: QUESTION...Is there anything to file? As it ceases to be a rental property, wonder something needs to be done with IRS? (It’s not sold yet, however not generating income either)
QUESTION...I assume Canada does not consider this time as ‘principal resident’, even though I’m not renting and will use as my home while in Canada.[b/]

Phase3 (Canadian resident, primary home in Canada):
CRA: As a Canadian resident with this being the principal resident, nothing special to do.
IRS: [b]Question :Is there to file as related to the Canadian home?
QUESTION: How will IRS treat my home in USA as I am a Non-Resident now? [/b] Not rented so no CRA reporting.

Phase4 (Selling the Canadian home):
CRA: File Form T2091 and schedule 3 as the home was not my principal residence for every year that I owned it, I have to report the part of the capital gain on the property that relates to the years for which I did not designate the property as my principal residence...[b]QUESTION: As a US resident, while the house was not rented (used by me for less than 183 days/year), can I designate the home as ‘principal resident’?[/b]

IRS: [b]QUESTION I assume there’s nothing to file...does it matter it was a rental property a few years ago?[/b]

Miscellaneous: [b]QUESTION: What happens when I sell the US home as a Canadian resident? I think after 2-3 years (which?) of becoming a Canadian resident I’ll be paying capital gains, other wise I don’t have to pay any?
I wonder whether IRS will now consider this as a second home and tax me on capital gains. If so, I’d think I pay the IRS and take credit with CRA[/b]

Gilgamesh
Posts: 76
Joined: Tue Apr 02, 2019 5:30 pm

Re: Dual citizen, Canadian home. Started as a rental & USA resident, ends as principal residence as a Canadian resident.

Post by Gilgamesh » Sat Apr 13, 2019 1:13 pm

I think I got some of the answers...hope these are correct.

Phase 2: While I am a USA resident Canada will not accept the Canadian home (even though not rented, and only I use it for less than 183 days/year) as primary residence. I have to be a Canadian redsident.

for Phase 4: Dual citizen selling A Canadian home as a Canadian resident.

Both Canada and USA will accept this as the primary home. CRA: I’ll be paying taxes on 50% of the capital gains for the years when the home was not primary residence at the marginal tax rate. Owe no capital gains when it was my primary residence. IRS will,exempt up to $500k of capital gains (married filing jointly, otherwise $250k) and above that is taxed at capital gains rate.

I guess that also means IRS will consider my Florida home my second home and tax all capital gains when I sell that (unless I sell within 3 years of becoming a Canadian resident, in which case for 2 out of 5 year’s I would have had that home as primary residence)

Gilgamesh
Posts: 76
Joined: Tue Apr 02, 2019 5:30 pm

Re: Dual citizen, Canadian home. Started as a rental & USA resident, ends as principal residence as a Canadian resident.

Post by Gilgamesh » Sat Apr 13, 2019 1:28 pm

Questions remaining ...(of course I’d also appreciate if errors are pointed out as well)

1) Phase 1 (Dual citizen, US resident...renting home):....How to calculate exactly how much Canadian credit can be applied to IRS? Also, I would think I can deduct expenses that could be deducted for Canada with IRS as well. On top of the typical Canadian expenses, USA allows to deduct depreciation. Therefore even with the partial credit for Canadian taxes, shouldn’t USA taxes be none to negligible?

2) Phase 2 (USA resident, not renting Canadian home): Do I only file T1161 with CRA? Is there anything to file with IRS? As it ceases to be a rental property, (It’s not sold yet, however not generating income either)

3) Phase3 (Canadian resident, primary home in Canada): Do I have to file anything with USA?

Thanks

nelsona
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Re: Dual citizen, Canadian home. Started as a rental & USA resident, ends as principal residence as a Canadian resident.

Post by nelsona » Mon Apr 15, 2019 10:48 am

US taxpayers MUST depreciate rental property, Cdn taxpayers MAY depreciate (CCA).
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.

Gilgamesh
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Re: Dual citizen, Canadian home. Started as a rental & USA resident, ends as principal residence as a Canadian resident.

Post by Gilgamesh » Mon Apr 15, 2019 2:10 pm

As I understand, depreciating in Canada doesn't help with taxes, but I think you had mentioned in a different post it's easier to keep track of things if it's depreciated in Canada as well. Can you elaborate a bit? would this help when the house is sold? and how?

Thanks!

nelsona
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Re: Dual citizen, Canadian home. Started as a rental & USA resident, ends as principal residence as a Canadian resident.

Post by nelsona » Mon Apr 15, 2019 2:38 pm

Why would you say that depreciating in Canada wouldn't help with taxes?!

Since you must depreciate in US, not doing so in Canada can cause a tax mismatch EVERY YEAR (ie no income thus tax owed in US, and tax owed in Canada with no commensurate tax credit). and then at recapture time, you would have the opposite, high US tax with no Cdn tax to use it against.

This would apply to a rental in US or Canada.
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.


Gilgamesh
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Re: Dual citizen, Canadian home. Started as a rental & USA resident, ends as principal residence as a Canadian resident.

Post by Gilgamesh » Tue Apr 16, 2019 8:07 pm

When I stop renting and start using it as my second home (I’m still a US resident, so primary home in USA) will it trigger capital gains in Canada due to conversion of purpose...also will transitioning from secondary home to primary home along with becoming a Canadian resident trigger any capital gains?

Thanks!

nelsona
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Re: Dual citizen, Canadian home. Started as a rental & USA resident, ends as principal residence as a Canadian resident.

Post by nelsona » Tue Apr 16, 2019 9:38 pm

The conversion of a rental into a cottage (there is no concept of second home in Canada) *might* be considered a change in use. The future conversion to a principal residence definitely would. And you would not be allowed to defer taxation until sold if you had used CCA at any point.
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.

Gilgamesh
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Joined: Tue Apr 02, 2019 5:30 pm

Re: Dual citizen, Canadian home. Started as a rental & USA resident, ends as principal residence as a Canadian resident.

Post by Gilgamesh » Wed Apr 17, 2019 1:34 pm

After reading this https://www.canada.ca/en/revenue-agency ... s-use.html

It looks like if I go from rental property to principal residence, and didn’t recapture CCA (I hope this is only for Canada and USA depreciation doesn’t count), then one could avoid paying capital gains until I sell the property. This election can be made up to 4 years prior to the property becoming the principal residence.

However, going from a rental to cottage seems like is a taxable event...

But, what is the distinction between a rental and cottage, when it’s rented for parts of the year? Say I am willing to rent it for 186 days and use it as a cottage for the remainder? at the same time hike up the rent such that it will never be rented.

nelsona
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Re: Dual citizen, Canadian home. Started as a rental & USA resident, ends as principal residence as a Canadian resident.

Post by nelsona » Wed Apr 17, 2019 2:21 pm

That is why I'm saying it *might* be a taxable event. There is nothing in the language that specifically says that a rental becoming a non-rental is a change in use. I
The prohibition on CCA is only on CCA, not IRS depreciation. I think you will find that you will want to CCA, since depreciation in US will give you quite a mismatch in year-to-year-taxes. I would suggest that you would also WANT to claim change in use when making it a cottage, so that you would settle on that property, since you would decide to owe Cdn taxes, and there is treaty provision XIII(7) where if one country (Canada) has a taxable event that would not ordinarily be a taxable event in the other country (US), one can elect to have that other country treat the property as having been sold and reacquired at that time. Change of use would be one of those situations. This would mesh your taxes on that property, so that you would probably not owe any US taxes, and get a big step-up in cost basis for future actual sale.

In your case, this would close the books on that previous time of ownership, and you could move forward and eventaully make it a principal residence, now being able to elect to defer even if you had the 'cottage' for a few years, since CCA would no longer be an issue.
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.

Gilgamesh
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Re: Dual citizen, Canadian home. Started as a rental & USA resident, ends as principal residence as a Canadian resident.

Post by Gilgamesh » Thu Apr 18, 2019 10:32 am

I understand that by claiming ‘change of use’ to a cottage, I spread out the capital gains taxes and thus keep it in the lower tax brackets (there’s time value of money to consider by ‘pre-paying’ taxes). So, I don’t pay all my capital gains in one year. Also, I get a free step up in basis (by using treaty you mentioned) on the USA, if in case I incur 15% capital gains when I sell it (as primary residence only if gains above 250k/500k single/MFJ). If real estate appreciation is lower than the exemption, there is no advantage on the USA side. Is there any advantage I’m missing?

Now, if I do CCA before change of use to a cottage and then pay CC gains for that event...but going forward I do not do CCA as cottage (no need as I’m not generating revenue), will I incur forced capital gains when I go from cottage to primary residence as I did CCA when it was a rental property? (but capital gains when it was a rental was already paid)...

I would have to think about meshing taxes together, but as I see a possibility where my net rent will be zero (rent may equal cost incurred, not counting depreciation), so meshing taxes may not be an issue at all....

Thanks Nelsona!

P.S: I hope your move back to Canada is going great (reading though some older posts it sounded like you may have moved a few months ago).

nelsona
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Re: Dual citizen, Canadian home. Started as a rental & USA resident, ends as principal residence as a Canadian resident.

Post by nelsona » Thu Apr 18, 2019 3:23 pm

Actually that is not what I meant by claiming change of use. I'm saying since it IS a change of use (either when you change to cottage of change to principal residence, and you WOULD have cap gains to pay to CRA, you should trigger a deemed sale in US as well, so that you can use the Cdn tax against the US tax and be done with it. Resetting everything to zero in that year.
Once that is settled, the slate is clean, you will not have CCA against the cottage and will be able to elect, when to make it your residence to defer what little tax you might owe from the cottage period.

You don't get the 250K exemption if you used the property as a rental, since you must recapture depreciation, even if you did not claim any.
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.

Gilgamesh
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Joined: Tue Apr 02, 2019 5:30 pm

Re: Dual citizen, Canadian home. Started as a rental & USA resident, ends as principal residence as a Canadian resident.

Post by Gilgamesh » Fri Apr 19, 2019 6:35 am

Ontario’s Non-Resident Speculation Tax of 15% does not apply to Canadian citizens, non-residents right? So, I could buy a property as a US resident without incurring this tax.

Gilgamesh
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Joined: Tue Apr 02, 2019 5:30 pm

Re: Dual citizen, Canadian home. Started as a rental & USA resident, ends as principal residence as a Canadian resident.

Post by Gilgamesh » Fri Apr 19, 2019 9:26 am

Although this doesn't affect me, as I will be a Canadian resident when I sell the property. Does the 48% non-resident surtax apply to cottage sale?

Say a dual citizen purchases rental as a US resident, rents it and sell it as a resident. On the Canadian side he have capital gains of 50% of the marginal tax bracket and another 48% surtax?

How would this even work? say purchase price $300k and sold for $550k. Capital gains is $250k and 2019 capital gains rate (for Ontario) even without any other income is 26.76% so, that's a tax of $66,900.

How is the surtax if any is applied? it is 48% of the federal tax bracket. So that's 15.84%. Will that be applied to the remaining 183,100 for another tax of about $29,000?

Thanks!

P.S: I of course understand if nelsona is tired of answering my boat load of questions.

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