A few weeks ago, I mentioned that the Fifth Amendment is supposed to protect Americans from the the Federal government confiscating their property without due process. Yet the capital gains tax is exactly that: a seizure tax which actually impoverishes Americans. The Cato Institute has done an excellent video explaining why capital gains taxes is theft, pure and simple:
So first the central bank robs savers blind by devaluing the dollar. Then government taxes the nominal capital gains (that are actually losses when inflation is considered). “Nominal” means the dollar figure goes up but the actual buying power of the sale price remains consistent with the earlier purchase price. The house owner hasn’t made any real gains at all.
Now this is one good reason that Canadians enjoy zero capital gains tax on their primary residence. Moreover, housing tends to go up everywhere at once, and when Canadians sell a house, there is no actual extra money anywhere because they often just go out and buy another house which has been subject to the same nominal gains.
Let’s say that an American in Canada bought a house at CDN $500,000 in 1999 which is now worth CDN $1,000,000. If he sells it, it would have a nominal capital gain of CDN $500,000; now the CRA says the gains are all exempt because it is his primary dwelling, but the United States says he owes 20% on the $250,000 because only the first $250,000 is exempt; and so now he must pay the IRS $50,000 in taxes. But of course if you take the exchange rate into consideration, the tax owing would be higher–since the exchange rate when he bought the house was around 1.50 CDN/US; now it is one to one. So the initial purchase price was CDN $500,000/1.5=US $333,333; capital gains= US $1,000,000 (sale price) – US$ 333,333 (Original purchase price)=US $666,667-$250,000= 416667*20%(Obama’s capital gains tax rate)= $83,333 in taxes.
But of course, the IRS knows nothing about real estate transactions in Canada so you have to hand over this information voluntarily and then voluntarily write the cheque to them, because if you are a Canadian citizen, the CRA will not collect these capital gain taxes for the IRS. But now, if that man turns around and buys a new house, he will find that he needs all $83,333 in taxes that the IRS received even just to be able to access a house similar to the one he sold. I.e., the gains were all nominal, since the house didn’t really go up in real value during the 13 years that he lived in it.
Well, this should make you want to go out and renounce your citizenship. Or not. For how would the IRS ever find out that you sold your home–or that you even own a home in Canada–unless you tell them? Our worst enemy is the IRS. It is the greatest threat to our prosperity. The second worst enemy we have is ourselves, because of our voluntarily ratting on ourselves to our worst enemy by giving them information that they wouldn’t otherwise have, whereby they can assess us huge tax liabilities.
But how do we have any choice when to not do would be fraud with draconian penalties.
@Petros there is an exclusion of $250k for individuals and $500k for couples on the net proceeds.
@petros, your points are all valid. If your home is located outside of the US and the value of the US dollar depreciates with respect to the currency used to buy and sell your home, then this is largely a tax you owe based on the loss of value of the US dollar. This is especially significant if you live in a country, like Switzerland, where over a recent 10-year period the Swiss Franc increased in value over the dollar by some 60%.
With respect to capital gain tax on your personal residence, the first $250,000 of gain ($500,000 if married and filing jointly) is not subject to tax, by the IRS. I believe this applies, but correct me if I am wrong, on the sale of your personal residence whether it is located inside or outside of the US.
The only way the IRS is likely to know that you have sold your personal residence outside of the US and had a taxable capital gain on the sale is if you tell them. If you do but they find out by some other means then you have committed tax fraud by failing to report it.
If as a US citizen resident abroad you are married to a foreign citizen not subject to US tax, then you are considered as single for US tax filing purposes.
@ bubblebustin Before I rework the example, tell me what is the exemption: the first $225,000 in capital gains; or is it the first 225,000 in gross sales?
Pamela, the woman who was reported on in the Swedish article, faced a penalty for not reporting her apartment. According to the article, the penalty was assessed based on the full value of the apartment, not on the value less what she still owes on her mortgage.
I think the cost of living in Sweden is quite high, so likely the value of Pamela’s apartment (which I assumes she owns as her principal residence) is also high.
It’s outrageous enough that principal residence is included in FBAR penalties. That is further compounded by considering the full value without deducting the amount owing.
@petros, it is the first $250,000 in capital gains (profit) that is exempt from US tax. The 1040 tax filing instructions indicate that you need not even report the sale if the capital gains amount is within this limit.
I keep saying it but that John Stossel video about “Everything Being Illegal in America” is so true. It’s a good video. Things there keep getting worse. They keep adding more and more laws. Lawmakers there want to make a name for themselves and get promotions, so they get off on throwing people in jail, irrespective of the severity of the infraction.
As Stossel pointed out, you may be right, and they may be wrong, but they will bankrupt you if you want to fight them. And I’m not talking about the IRS, but rather ANY branch of the US Government.
I don’t like capital gains taxes, but I think that most countries charge them.
This is one of the reasons I am eager to renounce ASAP. I’m glad it came up.
@Roger I was told by someone (an accountant I think) that if you are married to a non US person, you are “married filing separately” If you have good reason to know otherwise, please tell me.
If you are married to a non US person, and you sell your house. Do they expect the US person to claim the whole capital gain, or just half of it. I got the impression from reading the IRS material that you are expected to claim the whole gain.
One way the IRS might be able to tell you sold your house, would be if you didn’t buy another one right away, and a large amount of money was added to your accounts. They certainly might question you about where it came from. I guess the solution would be to put all the proceeds in your spouses account. Hopefully you can trust your spouse!
My MP John Weston, who is Minister Flaherty’s point man on issues effecting duals said that here may be hope in Article XXV of the treaty that would make this tax unfair. My lawyer says not so because other parts of the treaty negate it (!?) Any treaty experts out there who could confirm either way?
I have updated the example to reflect the $250,000 exemption. I had to use an imaginary person, not myself, since my house isn’t valuable enough to kick in capital gains in either country. Not yet. When hyper-inflation hits the United States, then even my little house will be worth a million US or more.
Such an imaginary persons, though, are followers of the Isaac Brock Society, so that my musings are completely realistic. Some people here own 1m houses that have doubled in value over the last decade or so.
@CanuckDoc, The Form 1040 instructios or the IRS Pub. 54 Tax Guide for residents abroad specifically state that if the US person is married to a non-resident foreign citizen whose income is not subject to US taxation that the person’s filing status is as a Single Person.
It would seem to me that the only way a US citizen residing outside of the US and married to a foreign national can really survive is to maintain separate bank accounts and arrange to have all foreign assets as humanly possible in the name of the non-US citizen spouse. Quite obviously it must be a marriage relationship that is not on a “divorece him/her and run” basis, for this to be successful.
CanuckDoc: Renounce now! Don’t wait. It took me 10 minutes and one meeting to get it over with here in Calgary. I will continue to file for 2011 and part of 2012. As for the exit tax, I’m not worth that much anyway and yes, half my assets are owned by a ‘Canadian’. According to the very expensive and smart tax lawyer I’ve worked with, I only include my half of our
assets when doing the calculations. I will be posting more on my renouncing experience in the next day or two.
@itacaf I wish I could but i have good reasons for having to wait, having consulted a reputable professional
@Roger I just looked in the new Pub 54. I can’t find it. Maybe it was in previous ones. Not that i don’t believe you. i just want to make sure i can find it if anyone ever questions me. I filed as single before, but the accountant told me it should be married filing separately.
Any opinions on how this is affected if you have previously elected to have a non-resident alien spouse treated as a resident? By do that are they now considered a “U.S. person”? FBAR requirement also?
@canucDoc, I read this just the other day but can’t put my finger on it at the moment. But I did find this statement on an IRS website by doing a Google search:
“Married Filing Jointly
Generally, you cannot file as married filing jointly if either spouse was a nonresident alien at any time during the tax year. However, nonresident aliens married to U.S. citizens or residents can choose to be treated as U.S. residents and file joint returns. For more information on these choices, refer to Nonresident Spouse Treated as a Resident” This is also in the Form 1040 instruchtons under Married Filing jointly, non-resident aliens and dual-status aliens.
A non-resident alien can chose to be treated as a US citizen and thus file jointly, but I can’t think of a reason why any non-resident alien spouse with a sound mind would ever want to to this.
@CanuckDoc
Take a look these 2 sites:
http://www.aca.ch/aliensp.htm
http://www.aca.ch/joomla/index.php?option=com_content&task=view&id=424&Itemid=46
@Roger This from the first ACA website noted above. Which is not to say you didn’t see it otherwise somewhere. Just maybe that IRS guidelines are confusing!
“Once married, the citizen (this includes, in all cases, a green card holder) can no longer file as “Single” for that tax year. It is unlikely that the alien spouse has a Taxpayer Identification Number. The dreaded filing status of Married Filing Separately with all its unwelcome limitations and penalties looms on the horizon. “
@Roger
re: “…but I can’t think of a reason why any non-resident alien spouse with a sound mind would ever want to to this.”
Sound mind — or no reason to suspect you are walking into one of the many traps, seemingly set for the non-suspecting.
Taxing capital gains on our residences, even though there is an exemption, seems to me taxing apples and oranges and bananas, etc. Home values vary vastly based on where that home is located. Many places, like Calgary, have seen assessments balloon. That can be a good thing depending on when and if you wish to sell.
I have no wish to sell the house I live in (even if make-believably for a US Exit TAX). My home is my home and, unless something changes my mind, this is where I will live for the rest of my life. Then, that home is my children’s inheritance and I want none of their inheritance of what I have earned in Canada (before or after I happen to die) to go to the US. Canadian laws will be observed, of course. God-wiling and the creeks don’t rise, my renunciation will come first.
@CanukDoc, so that sounds like an odd situation where the citizen must file as Married Fiing Separately, but the nonresident alien spouse wouldn’t file a return, right?
@ Petros, correct me if I’m wrong, but I believe that within 2 years we will be required to disclose our real estate as a foreign financial asset. I can’t find what the thresholds might be, such as the $200k for our bank accounts, or even exactly when. Plan accordingly. If my crystal ball hadn’t failed me, I would have certainly planned better.
@canuc doc, here is another copy and paste statment from IRS publication 17 which I just found on line
:”Nonresident alien or dual-status alien. A joint return generally cannot be filed if either spouse is a nonresident alien at any time during the tax year. However, if one spouse was a nonresident alien or dual-status alien who was married to a U.S. citizen or resident alien at the end of the year, the spouses can choose to file a joint return. If you do file a joint return, you and your spouse are both treated as U.S. residents for the entire tax year. For information on this choice, see chapter 1 of Publication 519.
This seems to make it very clear. Unliess you want your non-resident alien spouse to pay US income tax you can ONLY file with a “Single” status..
There really is no solution except a) renouncing/relinguishing if this is possible without painting a bulls-eye on you or b) simply avoiding the USA. It is more difficult if you are young (<60 years) and have your USA birthplace stamped on your Passport and may need to visit for whatever reason. Also simply moving funds into a "customer/shareholder Credit Union" avoids all this FACTA nonsense. I am not young and have only rarely entered the USA (maybe once every three years) for decades and will not do so again. Europe and Asia are so more interesting and I do not have to worry about being thrown in jail for exercising article 15 of the Universal Declaration of Human Rights. .http://www.un.org/en/documents/udhr/index.shtml#a15 . As I remind my relatives ALL the time: "Canada is a different country from the USA." And Canadians of all political stripes have a healthy suspicion and distrust of the USA.
If you sell your home and put the money in the bank you will have to report this in your FBAR and the IRS may want to know where the money came from. Do you all think that this can work this way?
@joe smith and all others. As an American citizen who 35 years ago was forced by the Tax Reform Act to decide between renouncing US citizenship to become a citizen of the country where I was living (Brazil), or return to the US, I returned to the US to never live abroad again.
Recognizing the cold hard facts of the US citizenship-based tax poilicym FATCA, FBAR, etc. any US citizen who is contemplating living outside of the United States for anything beyond a short term must recognized that the only viable way this is possible is to become a citizen of that country and renounce your US citizenship. Otherwise you will be forever at the mercy and whims of the US Congress which, make changes to the current legislation and totally destroy you. Currently there is a bill before Congress to abolish the Foreign Earned Income Exclusion completely and it would not surprise me at all if any day a bill would be introduced and enacted into law that would disallow the use of foreign tax credits to offset the US tax obligation on income subject to taxation by both the US and the country of residence.
In my humble opinion the UN Declaration of Human Rights is in crying need of being amended to include not only the right of every human being to freely leave and return to any country, including his own, but to also not be subject to taxation by his own country if he exercises this right to leave.
By UN Security Council Resoluition 2023 passed with 13 votes in favor, none in opposition and 2 abstentions on December 5, 2011 the UN condemned Eritrea for taxing its diasporta – that is its citizens living abroad – for continuing to be subjected to Eritrean taxes as a violation of the human rights of citizens of that country. Susan Rice, US Ambassador to the UN led the charge, so to speak, in enacting this resolution, even though the condemned tax policy of Eritrea is identical to the tax policy of the US.
Please allow me to suggest that any of you who are dual US-Canadian citizens, or dual US citizens of any other country and living in that country, propose to those who represent you in our goverment that it sponsor such an amendment to the UN Declaration of Human Rights.