Rental while living in Canada,

-----Or
My_question_is: Applicable to both US and Canada
Subject:        US Rental while living in Canada, waiting for house to sell
Expert:         taxman at centa.com
Date:           Monday August 22, 2005
Time:           06:15 PM -0700
QUESTION:
Hi.  We shall soon be leaving the US to move back to Canada.  We own a house
in the US (none in Canada) but the housing market in our area is poor and we
believe the chances are poor that the house will sell before we leave, or
even before the year ends.
If we were to rent out the house until it sold (or rent with an option to
buy) while back in Canada, what would the tax implications be for both
countries?  Am I incorrect to think that both Uncle Sam and Revenue Canada
will want their share of the revenue generated by the rent?  Who do we pay
taxes to first?
Thanks.
-----------------------------------------
david ingram replies:
The house will be capital gains tax free as your principal residence in the
US provided you have lived in it for 2 years out of the last five.
Conceivably there could be a problem with gains after you leave the country
but at this point, I have not seen anyone taxed in this situation.
Canada would still say that it was your principal residence.  If it sits
empty, there would not be any tax on it as it is quite okay to have a
principal residence out of the country.  In addition it is revalued for
Canadian tax purposes at its value when you enter the country.
On the first Canadian return you file on the rental if it has not sold, you
would file a section 45(2) election which says in effect:
I hereby elect to teat this residence as my principal residence even though
I do not ordinarily inhabit it.
This election is good for four years but only really applies if you do not
buy another house in Canada when you arrive.  If you do buy a house in
Canada, it is more logical that the new house would be your principal;
residence and you would pay tax to Canada on any increased value on the US
house after you return.  However, your statement about the real estate
market does not indicate that there will be any profit after you leave.
You will pay any tax on rental to Uncle Sam first and then report it again
in Canada.  The CRA will give you a credit for any tax paid by putting the
tax on line 431 of your Canadian return and the net rent on line 433 and
following the calculation.
Don't worry about the tax portion.  Just get he house sold so you can buy in
Canada.  Better to discount it $5,000 for a quick sale and have the money
available here.  If you rented in Vancouver for the last year while waiting
to get an extra $20,000 in the US on your old house, it would cost you $50
to $100,000 extra for the house you wanted in Vancouver.
Every area is different, but you will get the idea.
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