U.S. persons in Canada must pay capital gains tax on sale of principal residence – makes upward mobility difficult

Payable by U.S. persons on the sale of a principal residence

“The principal residence exemption provides Canadian taxpayers with a generous tax break, possibly one we take for granted. In other countries the gain on the sale of a residence is not always completely free of tax. In the United States, for example, only the first $250,000 is exempted. For Canadian tax purposes, there is no monetary limit on the size of the capital gain that can be excluded from your income.”

So says: HR Block Canada in Tax Talk

It may come as a surprise to U.S. persons (Green Card holders, citizens or those who spend too much in the U.S.) that capital gains from the sale of a principal residence are taxable. The general principle is described here. The principle is that one gets a $250,000 exemption from capital gains tax. But, as always make sure that you read the rules carefully.

This is one more example of how citizenship-based taxation harms U.S. persons who live outside the U.S. For example, in Canada, the sale of a principal residence is a “tax free capital gain”. Not so in the U.S. What does this mean practically? A lot.

It means that it is very difficult for a U.S. person in Canada to trade houses – i.e. upgrade to a nicer house. To the extent that the gain exceeds $250,000 this means that the U.S. person is subject to a capital gains tax. There is no offsetting credit (because the gain is not taxed in Canada). This quite obviously will make a move to a new house much more costly.

Those interested in moving  might consider selling their existing home prior to the expiration of the Bush tax cuts. If those tax cuts are not renewed, and if you have owned a home for a long time that has appreciated substantially, you need to minimize the capital gains tax payable. In addition, please remember that under U.S. law, 100% of the capital gain is taxable. For information on long term capital gains (most real estate should qualify) read here. The bottom line appears to be that:

For 2012 the tax rate on the sale of your principal residence will be 15% of the gain. Remember that the first $250,000 should be excluded.

For 2013 (assuming there is no relief) the tax rate on the sale of our principal residence will be 20% of the gain. Again, the first $250,000 will be excluded.

Example:

You will find an example of the principle here.

Home purchased in 2000 for $500,000.

Home sold in 2012 for $1,200,000.

Gain should be calculated as follows:

Gain = $1,200,000 less [$500,000 + $250,000 exclusion] = $450,000.

Tax for 2012 = $67,500 which is 15% of $450,000

Tax 2012 = $90,000 which is 20% of $450,000

Conclusions:

1. It pays to sell in 2012

2. It is much more difficult for U.S. persons to upgrade their homes.

Implications for investment:

Invest in rental properties. It is clear that home ownership for U.S. person regardless of residence will become harder and harder!

And finally …

This blog post is neither legal not accounting advice. It is designed only to equip you with some thoughts and information so that you an have an intelligent conversation with you advisor(s). Remember that the rules can and do change quickly.  This is just one more example of the hardships experienced by U.S. citizens living abroad.

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8 thoughts on “U.S. persons in Canada must pay capital gains tax on sale of principal residence – makes upward mobility difficult

  1. Petros

    Divide capital gains by one half if the property is jointly owned by two people.

    Capital gains in any case are mainly caused by inflation, which is government devaluing currency in order to rob the investments of the People. The tax on them is immoral in my view.

    Reply
  2. Ambaji

    And to make it worse, US residents are allowed to write off the cost of their mortgage on their income tax. Canadian residents are not. The capital gains exemption on personal residence makes up for that, for Canadian residents. Another loss for duals living in Canada.

    Reply
  3. Pingback: #IRS isolates Congress and US tax laws as the problems for #Americansabroad by providing penalty relief | U.S. Persons Abroad – Members of a Unique Tax, Form and Penalty Club

  4. Tommy

    How about if the estate was given by another person for free, when I sell the estate, how will the capital gain tax based on? 100% of the selling price?

    Reply
    1. renounceuscitizenship Post author

      Tommy,

      Under current U.S. law the cost basis would be the fair market value when it was inherited. Therefore, the capital gain would be based on the difference between the sale price and that fair market value.
      Interestingly, Obama (as he is expected to say in his State of The Union address this evening, views this as unfair to the government and wants these rules changed. (This will be nothing but political posturing. But, it does show how much of Obama is based on the politics of envy.

      Reply
  5. Justme

    I am Canadian and my husband is American. We bought our house in 2009 for $300k. The house is now worth about $500k, so we are just under the capital gains amount. However, we are not selling anytime soon, and houses are gaining 8-10% per year here. It will not take long for our house to go into capital gains tax territory.

    As an example, if we sell the house in 10 years time, assuming an unchanged 10% yearly gain, the house will be worth about $1.3m. This totals a $1m capital gain, less $250k exclusion = $750k subject to tax.

    Questions:

    Since we are married, doesn’t that increase the exclusion to $500k?

    If not, how does the tax calculation work? I seem to understand from above that the capital gains tax would be cut in half, is this correct? So 20% of $750k gain = $150k “tax”/2 = $75k actually owing, not $150k??

    Is the capital gain considered “realized” (and therefore taxable) if the amount is rolled directly into another home? Or is it “unrealized” until we move out permanently and/or downsize, thus the “gain” is now “cash”??

    This gets me more angry the more I think about it. I am not American, and they are robbing me and my family for benefits we will never see since we will never live there.

    Reply
    1. renounceuscitizenship Post author

      No, it does NOT increase the exclusion to 500,000 because you are NOT a U.S. citizen and presumably are not filing U.S. tax returns.

      No, you can’t avoid the tax by rolling it over into a new property.

      No, the capital gain is NOT cut in half. In the U.S. the complete capital gain (less the exclusion) is subject to tax.

      So, it’s worse than you thought. I now, I will add another negative that you missed:

      The capital gain (or at least part of it) is also subject to the 3.8% Obamcare surtax.

      Yes, you should be angry. It’s the price you and your family pay for being married to an American.

      This is a problem that will only get worse.

      Your husband should renounce U.S. citizenship to protect you and your family.

      ___________________________________________________________

      Reply

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