Cross-Border Real Estate and the Principal Residence Exemption
The complexities that come from a cross-border move are plentiful, which especially holds true when dealing with real estate. The principal residence exemption becomes more intricate for U.S. citizens living in Canada and owning Canadian real estate.
While the tax laws differ for real estate transactions in the U.S. and Canada, it is important to be aware of such laws that could impact the amounts of capital gains tax payable upon the sale or disposition of such property. We frequently come across the principal residence exemption while developing cross-border retirement plans. You may be asking yourself what the differences are when it comes to the principal residence exemption based on your residency and citizenship.
Canadian Citizens:
Under current tax law in Canada, your principal residence is exempt from all capital gains taxes, regardless of the increase in value. Your principal residence is defined as the housing unit that is ordinarily inhabited during a particular year, while not designating principal residence years of ownership to a different property.
U.S. Citizens:
Under current U.S. tax law, each U.S. taxpayer can claim a principal residence exemption, often referred to the capital gain exclusion for $250,000 USD on the sale of your eligible home. For legally married couples filing a joint U.S. tax return, this exemption doubles to $500,000 USD, with any excess subject to federal long-term capital gain tax at rates up to 20%. For U.S. Citizens, the principal residence exemption applies when you live in your home for two of the last five years. Generally, you are not eligible for the exclusion if you excluded the gain from the sale of another home during the two‐year period prior to the sale of your home.
What Happens for Cross-Border Clients?
For U.S. citizens living and owning a home in Canada, the difference in laws may affect you. Many Americans are not aware that while living in Canada, U.S. tax law still applies to them, so while you may believe that you could be exempt for paying taxes on the sale of your principal residence in Canada, without proper planning you could end up owing capital gains taxes upon the sale of your home. Having a detailed cross-border financial plan can identify those issues and ensure you are making the correct decisions with your money.
Looking for Cross-Border Retirement Planning Help?
Our team of cross-border financial advisors works with you to prepare a cross-border financial plan, thoroughly analyze your overall situation and offer personalized guidance around these topics. If you are looking for help with your investments, Plena Wealth Advisors specialize in managing both Canadian and U.S. retirement accounts (IRA, 401(k), Roth IRA, RRSP, TFSA). Set up a call with our team of cross-border financial advisors today.
Information in this article is from sources believed to be reliable; however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The views are those of Plena Wealth Advisors, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.
Raymond James (USA) Ltd., member FINRA/SIPC. Raymond James (USA) Ltd. (RJLU) advisors may only conduct business with residents of the states and/or jurisdictions for which they are properly registered.