A U.S. person say residing in Canada who files married separate their U.S. 1040 only can exclude $250K USD of their capital gain on the sale of their principal residence provided certain prescribed criteria is met. If the property was held more than a year, the maximum tax rate on long-term capital gain is 15% (or to 20% if their taxable income attains a prescribed threshold).
The foregoing rule means that although there is no Canadian tax on the sale of the Canadian real estate, there will be U.S. tax that is not creditable on their Canadian return because the capital gain is not U.S. source.
Often the property is jointly held with their Canadian non-U.S. spouse. Planning opportunity to gift the property to their Canadian spouse may allow full Canadian principal residence exemption to the Canadian spouse on the sale of the home not withstanding that the U.S. spouse did not own the home for years subsequent to the transfer. The gift for Canada would be a spousal rollover. For U.S. reporting, a gift tax return, IRS Form 709 would be filed to report the gift and claim their available lifetime gift tax exemption.
If there is a mortgage on the property that is discharged, there could be IRS Code 899 income exclusion for the foreign currency gain on the discharge to the U.S. debtor.
If one is dealing with such homes that are also rented, the foregoing may or not apply cleanly, depending on the facts.
Contact your professional advisor prior to implementing any of the outlined strategies.
