I am a Canadian citizen who has been a US resident for a little over 4 years, initially on a work visa and now with a green card. My wife moved back to Canada 2 years ago and we are going through a divorce. We bought a house, in both our names, shortly after moving to the US. I have now decided to move back to Canada to be closer to my kids and am trying to sell the house. There will be capital gains on the house, for taxation in the US and Canada does it make a difference if the house gets sold before or after I move to Canada? Also, since half of the house belongs to my wife, what is the impact on taxation in the US and Canada of the fact that she moved back to Canada 2 years ago? Your help would be greatly appreciated.

ANSWER

The BIDaWIZ Team's Answer:

There are two issues to consider here: 1) the capital gains tax exclusion and 2) whether or not you're a resident alien or non-resident alien. Under Section 121 of the Internal Revenue Code, if you have owned and used a property as your principal residence for 2 out of the last 5 years, then you can exclude up to $250,000 of the gain on your US tax return when filing as single or married filing separately ($500,000 if married filing joint). How do you plan to file this year? If you do not meet the above requirements as of the date of sale, there is no chance for exclusion under IRC Sec. 121. Thus, where you live is important. If you do meet the IRC Sec. 121 requirements as of the date of sale, the next issue is to determine whether you are considered to be a resident alien or a non-resident alien. If you meet the tests to be considered a resident alien (i.e. you either hold a green card or meet the substantial presence test) for the tax year in which the sale occurred, then you will be eligible to use the exclusion available under IRC Sec. 121. The substantial presence test is comprised of two sub-tests -- a 183-day test and a 31-day test -- both of which must be met. The 183-day test is applied by adding the days of physical presence in the United States for the year being tested to portions of the days of physical presence in the two prior calendar years. Under this test, even if the total for the test year and the two prior years is 183 days or more, the person will not be treated as a resident alien for the test year unless he is physically present in the United States for at least 31 days during that year. Note that the 31 days need not be consecutive. The 31-day rule prevents a person from being classified as a resident alien for a year where he or she meets the 183-day test because of numerous days of U.S. presence in the prior two years, but has only minimal U.S. presence (less than 31 days) in the current year.