Typical investments — the kind the average person makes in planning for a sound financial future — can be rendered pointless or even have disastrous financial consequences due to US taxation of US Persons on income they make in their home country as well as siphoning non-US income out of that country and into the US.
This paper provides concise information on how tax-deferred accounts, mutual funds, and capital gains on the sale of one’s home result in taxes owed to the US. Useful to whip out if anybody tries to tell you that US extraterritorital taxation is no big deal.
Thanks to LM’s hubby, its author.
The $250,000 US capital gains exemption ($500k for couples) is not a lifetime amount. The exclusion is available every 2 years.
Eventhough couples get a 500K exemption on the sale of their primary res, they still have to pay the 3.8% Obamacare tax on that gain, correct?
Only to the extent their gain exceeds $500k and then they would still need to reach the NIIT thresholds to be subject to additional tax.
Nuts!
@ Phil – “The $250,000 US capital gains exemption ($500k for couples) is not a lifetime amount. The exclusion is available every 2 years.” Wow, just checked this out. This is good to know.
But how many of us sell our primary residence every few years? Maybe more than we realize. but me thinks most of us stay in one home for 10 or more years. That $250,000 once every 10 years and especially in Toronto or Vancouver. there likely STILL will be taxes paid. If only one could accumulate that #250,000/2 years so that when one sold the home after 10 years one could have 1,250,000 of tax-free gain.
Or is the US encouraging people to move every 2 years?
The egregious double taxation of investments in Canadian mutual funds should be a good case to take to the Canadian Competent Authority (presumably the CRA) under Article XXVI of the US-Canada tax treaty (Mutual Agreement Procedure).
Get your money OUT of the financial banking mafia.
Only solid placement is gold.
It’s value keeps on going up.
Actually it’s the value of FIAT currency (paper money) that keeps on going down.
The more they print or create on computers, less value it shall have.
Just look at the value of the stock market compared to the value of gold for the past 30 years.
That way they can’t get their hands on OUR hard earned money.
@Steven Tracy, you have a point. I may very well buy some gold Britannias, which are exempt from CG taxes, even if just a few ounces for peace of mind, stored at home, in case of a national emergency.
Great post, thank you Mr LM.
Then there’s those phantom gains that come back to haunt you. Eric describes:
…”Assuming a falling US dollar, there will be a phantom gain on the sale of the property where you are receiving money, but a phantom loss on the discharge of the mortgage where you are paying money. Assuming a rising US dollar, there will be a phantom loss on the sale of the property when receiving the money and a phantom gain on the discharge of the mortgage when you are paying the money.
US law does require you to pay tax on the “net” phantom capital gain but will not allow you a loss on the “net” phantom capital loss.”…
…”U.S. emigrants must pretend for tax purposes that they really earn & spend U.S. dollars and realise foreign currency gains & losses in every daily transaction in a foreign country, even if all their income, assets, and liabilities are in another currency.”…
http://isaacbrocksociety.ca/2015/05/31/congress-knew-about-diaspora-phantom-gains-problem-1986-refused-fix/
Whether the US gives the $250K/$500K exclusion or not, the point is you’re a Resident Canadian Citizen (RCC).
All FFIs should be forced to create in the KYC (Know Your Customer) process a category known as RCC and RCC’s don’t have to disclose their place of birth.
Otherwise if banks know that someone is US born, they’ll go ahead and disclose without fear of penalty in the current climate.
The US lives in fantasy land. Like it doesn’t collect all taxes owed within the US, it not going to collect all taxes ‘owed’ by US persons abroad.
Taxes have to be easy to collect. The US Congress should spend its time on viable budgetary solutions such as VAT/GST.
@LM, re “…. how many of us sell our primary residence every few years?”. I’ve noticed a fair bit of turnover out here nearer the border, and the houses tend to have been only a few years old, and most are the more expensive homes. Some have been sent here to a local plant or branch by the Canadian (or US?) company they work for. Some are in occupations where it is project or contract work, or shorter term postings (ex. 2 years). I think that places like TO or Vancouver with lots of expensive condos might also turnover when people bought them as investments – lived in them for the minimum time and intended to roll them over?
Seriously, how much revenue is likely to flow from Canada to the US due to real-estate gains? If you’re planning to live out your life in Canada, you’d be out of your mind to voluntarily write the US government a six-figure cheque (which could easily happen in Toronto or Vancouver) for capital gains tax. I imagine anyone in that position would either renounce prior to sale of a primary residence, or continue playing dumb – like most duals, who remain either wittingly or unwittingly non-compliant. The same argument applies to any other assets taxable in the US but not Canada. (FATCA isn’t a problem if you’re willing to lie to your bank.)
Can a dual sell his/her share in a house to the non-US spouse for $1.00? What implications are there in that? Just wonderin’.
@Nononymous
Agreed, but most people are too honest for their own good. Your place of birth/national origin/other citizenships are none of their business.
It’s a matter of self-respect. I don’t want to let the IRS force me into lying about who I am and where I come from. Their guns aren’t big enough to make that a worthwhile choice, for me.
@Veritas
Gifts to US and non US spouse
http://hodgen.com/tax-free-gifts-to-reduce-net-worth/
The US has specific gift tax rules that preclude certain spousal transfers.
@Marie @iota
Dishonesty is so simple and easy and effective. I highly recommend it.
@Nononymous – each to their own. I was just explaining my point of view.
Just out of curiosity (and maybe this has already been answered in the past) but what if the house makes a 800,000 gain and one person is a US citizen and the other is not …do you have to declare 400,000 (just your share ) or the whole 800,000?
2T2S
Phil Hodgen’s guide has some good advise
“When one or both members of a married couple decide to expatriate, you’re probably pretty safe dividing the assets in half when preparing each person’s Form 8854.
If you are at all unclear about who owns what, or if it might be useful to have an unequal division of assets between the spouses (oh, hypothetically speaking, the expatriating spouse magically has $1.9 million net worth on his Form 8854 balance sheet while the U.S. citizen spouse retains the remainder of the assets as her separate property), then do a postnuptial agreement to create the reality you’d like to present to the Internal Revenue Service.”
http://hodgen.com/question-about-expatriation-from-reader/
2T2S
You have to calculate YOUR net worth FIRST, then IF it is over $2,000,000, you calculate your unrealized GAIN. (Half if you share a house or any other assets.) You are allowed a $690,000 GAIN, before paying any exit tax on the remainder of that gain.
2T2S
If YOUR share of your NET WORTH is less than $2,000,000, you don’t need to worry about calculating any unrealized gains. They won’t carry an exit tax.
Nononymous,
— that’s what others say: http://www.bbc.com/news/world-35918844, as we are thrown in the same pot with them.
My accountant explained to me the distinction between owning our flat either as ‘joint tenants’ or ‘tenants in common’. We owned it jointly which means we both effectively simultaneously own it 100%, so it would go straight to me if he went first.m If we’d owned it as ‘tenants in common’ then we could either have owned it each 50% or in different ratios. Had the $2 million been an issue, we would have been advised to switch from joint tenants to tenants in common with appropriate ratios to bring me down below the two million, had it been an issue.