Ah the United States, home to a universal healthcare system and high capital gains rates. The US is a copy-cat though, there is an original purveyor of such a system, our brothers and sisters in the Great White North; Canada. A land where it ACTUALLY snows two feet when they say it will, where healthcare is free and capital gains are taxed at 50% (which is why Warren Buffet is a red blooded American).
With such a tantalizing array of goodies it is no wonder that American citizens have been flocking over the border for years, over a million strong and growing. These poor souls are about to get a rude awakening from their quiet life in Ontario or Saskatchewan with the arrival of the unforgiving IRS armed with Foreign Account Tax Compliance Act (FATCA). Now while many and most US citizens in Canada have been filing away their tax returns like good little citizens, properly reporting their income with a brotherly tax treaty, a huge and unassuming tax bill may be on the horizon.
As per the tax code, a US taxpayer selling a home in Canada must declare any amount over $250,000($500,000 if married) in gains, as a capital gain, otherwise known as a 10, 15 or even 20% tax rate(for those actually paying attention the Net Investment Income Tax(NIIT) surcharge of 3.8% does not apply thankfully). However in Canada the sale of a personal home is exempt from capital gains (which is good because the rate is 50%, phew!) so long standing Canadians with US citizenship are blissfully unaware that they are going to have to pay a whopper.
Now before FATCA and the free flow of information to the IRS, these Canadians simply did not disclose home sales because there was virtually no way that the IRS could verify it. No more. With a big pay out into a US citizen’s account of $200,000(single) or $500,000(married) (or $50,000/$100,000 if you live in the US) the IRS is going to know about it, and ask about it, and request its tidy fee. I should note that these amounts are for the individual reporting requirement under FATCA, under the Foreign Bank and Financial Accounts Report (FBAR) rules, which every US citizen with a foreign bank account must file, any account with $10,000 or more must be disclosed. Should your bank account abnormally swell, it will probably trigger an audit regardless because it will be obvious you sold something big.
So let us boil it down.
- As a US citizen you are entitled to exclude the first $250,000 in gains. (As long as it is generally your principle residence)
- If married and both spouses are US Citizens, or you file jointly the exemption is double to $500,000 (here comes the bride all dressed in green)
- If your spouse is not a US citizen and IS a co-owner (or a full owner for that matter) and you do not file jointly obviously, then their half (or whole) is completely excluded and the US citizen’s is back to the original amount if applicable.
The US system isn’t all bad though, you get to deduct the home mortgage interest on your properly filed tax return (assuming you are compliant, and you haven’t reached the Alternate Minimum tax of course)
So this serves as a long winded warning to those up north. Plan for it:
- If you have owned your home for a long time your basis can be incredibly low, which will make your gain fairly high as home sale prices have increased over time in your country. Keep in mind that basis changes will be contingent on currency volatility which can be a double edged sword. Know that your gain will be found, do not ignore it.
- If you are buying a home, plan for it now. What benefits do you want? A deduction now? Or a larger tax exemption later (if your spouse is Canadian). Always keeping in mind you NEED TO STAY CURRENT IN YOUR FILINGS.
One more note: It might seem like a cute idea to try and place the home in a corporate structure somehow so that the rate falls under Canadian favorable low corporate tax rate. These structures when utilized solely to hold the property can be classified as a passive foreign investment corporation (PFIC) and as the ridiculous name suggests is a real pain as far as tax rates go.
So as an American I must blame Canada. As a tax lawyer I must warn you: You can run but you can’t hide.
Benjamin Goldburd is an Associate at Goldburd McCone LLP a boutique tax law firm in New York City and Long Island.