Selling house before vs. after moving to Canada (Principal Residence Question)

[snuuz]

We are planning to move to Canada in Aug 2010. If we sell before we leave, it is clear that my spouse and would enjoy the $500,000 (married couple) principle residence exemption in capital gains.

However, our real estate person had advised us the summer months are the worst time to sell, and said we should sell either before May or after Sept for the best prices. The latter would actually work out better for us, as we would skip the hassle and cost of temp housing before the move, and it would be easier to fix up an empty house to sell after we have already moved out.

We plan to rent in Canada for at least a year after August. Our question is after our move, would we immediate lose resident status in the US and therefore lose the principal residence exemption? Since we would have lived more than 6 months in the US this year, we would be considered US resident from the IRS point of view, wouldn’t we? Would the CRA treat our home in the US as our principal residence after the move, and will therefore be tax free after the sale? Does it matter if we sell the house by end of 2010 or not.

In the 10th edition of book The Border Guide (a great resource BTW, keatsconnelly.com) an answer to a reader’s question said “your US condo can be both your Canadian principal residence and US principal residence for tax purposes.” So sounds like this can be done. Are there forms to file to declare this when we move in August? Or is this done when we actually sell the house?

 

[toby]

I'd double check that bit about being able to have a principal residence in the US while living in Canada. I recall that the CRA website defines residence a somewhere you actually reside.

However, if you are renting in Canada, and even though you take up permanent residence whan you do move to Canada, if you go back and forth to the USA you might be able to consider the US home a principal residence. Check carefully on this.

But if the ome is not considered your personal residence after you move to Canada, calculate the percentage of Canada time versus USA time when the house sells. The percentage of Canada time will be a taxable capital gain.

Example: If you bought for $100, lived there for 3 years, then moved to Canada for 1 year before selling the house for $250, the capital gain is $150, over 4 years. You spent 25% of those 4 years in Canada, so the taxable portion of the $150 gain is 25% = $37.50 .

Only half the $37.50 will be considered taxable income in your Canadian tax return.

However, a different consideration is worth noting. In Canada, if a non-residence sells a house, fully half is held back by the CDN government until the goivt is satisfied the seller does not owe other taxes. WHo knows how long it takes to get this clearance. So, check on the situation in the USA for a citizen who is NOT a resident. All of this might convince you to sell during the summer to keep things simple.