We recently received a call from a U.S. citizen married to a Canadian citizen. The couple lives in Canada and owns a home in Toronto together. Recently, the couple sold their Canadian home, which has been their primary residence for the last 11 years.
The couple had purchased the home for CDN $500,000 and, thanks to the booming Toronto real estate market, sold it for CDN $1,000,000.
The couple wanted to know if they would owe capital gains tax on the sale of their home in Canada and the U.S. The U.S. citizen has been filing her U.S. tax returns as married filing separate.
As the couple learned, the capital gains rules on the sale of a primary residence differ in Canada and the US and between the wife and her husband.
For purposes of their U.S. taxes, since the house is owned jointly the $500,000 gain is split equally between the wife and husband, which results in each having a gain of $250,000. Because the gain is not a U.S. source, the Canadian citizen husband obviously would have no U.S. tax consequences.
As for the U.S. citizen wife, however, she is obligated to file and declare her worldwide income in accordance with the U.S. tax laws. Therefore, her portion of the gain on the sale would be considered capital gains income in the U.S.
Although the couple had capital gain income, the U.S. and Canada have different rules on the taxation of this income.
Under U.S. law, an individual who files as married filing separate is allowed to exclude up to USD $250,000 of capital gain income from the sale of their home. The exclusion is available even though the home is outside the U.S. Moreover, the exclusion applies to a home that has been occupied for two of the last five years as a principal residence. In the couple’s case, they have been living in the home for 11 years, so the U.S. Citizen wife qualifies for the exclusion. Depending on the U.S. foreign exchange tax rules applicable to the purchase and sale price of a foreign property, the U.S. citizen spouse may have to recognize a portion of her capital gain as taxable U.S. income on her Schedule D.
Under Canadian tax law, when a principal residence is sold, the gain is not taxable if it has been the person’s principal residence for the whole time it has been owned. Unlike the U.S., however, there is no limit on the amount of gain that can be excluded. In the couple’s case, there is no need to report the sale of their home on their Canadian tax return.
At Gedeon Law & CPA, we work with clients on both sides of the border in handling the cross border taxation applicable to real estate transactions.