“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.
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
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.