6 replies to this topic

[icaa2009]

I am a Canadian who have been in the US since 24 Dec 2007 working for a US employer. I filed my US 2008 and (will be) 2009 tax returns. My employment ended late July 09, I am back to Canada on 25 Dec 09.

Currently trying to sell my residence, and wonder if I will be considered as non resident alien for 2010 tax purposes.

Many thanks for your help.

[Tax_Counsel]

Do you have permanent residence status (i.e. a green card) in the U.S.? And was your move back to Canada in 12/09 permanent?

[icaa2009]

To Tax_Counsel,

I am not a green cardholder. Had been in the US under L1 (intra US company transfer) visa.

I intend to go back to the US as an investor (E2 visa). I have established a Maryland corporation where I and other foreign investors will conduct businesses in the US. The process will take about 10 weeks or till end of March. However, no one can guarantee that I will get the investor visa.


Does residence determination works the same for Federal and state ?


Thanks.

[Tax_Counsel]

Ok, then for you what happens during the rest of 2010 will determine whether you are a resident alien at the time of the sale. Because you are not a greencard holder, whether you are a resident for tax purposes depends on whether you meet the substantial presence test. In general, you meet this test if you are present in the U.S. at least 31 days during the current year and were present for a total of 183 days during the 3 year period that includes the current year and the previous two years using a particular formula. That formula is the total of: (the number of days present in the U.S. in the current year) + (the number of days present in the U.S. in the previous year divided by 3) + (the number of days present in the U.S. two years ago divided by 6).

So, to determine whether you are a resident of the U.S. for 2010, you take (the number of days present in the U.S. in 2010) + (number of days present in the U.S. in 2009 divided by 3) + (the number of days present in the U.S. in 2008 divided by 6). And, of course, you must have spent at least 31 days in the U.S. in 2010 as well.

Even if you meet the test under this formula, you will be considered a non-resident alien if you spent less than 183 days in the U.S. in 2010 and you had a closer connection to Canada than you did the U.S.

See IRS Publication 519 for more details.

At the moment, you'd be a non resident alien since you have not spent any days of 2010 in the U.S. and you've moved back to Canada, thus suggesting you have a closer connection to Canada than to the U.S. So, should the home sell now, you'd be subject to the special rules under the Foreign Investment in Real Property Tax Act (FIRPTA) that apply to foreign persons selling U.S. real estate, including a requirement that the buyer withhold 10% of the sales price to send to the IRS as a credit against whatever tax you'd owe on the sale. That withholding amount can be reduced or eliminated if you get a withholding certificate from the IRS.

The inquiry for state taxes is different. They don't care about whether you are considered a resident alien of the U.S. Instead, they simply care about whether you are a resident of the state. Your income from within the state is taxed regardless of whether you are a resident of the state. Residency affects whether the state taxes income that arises OUTSIDE the state.

[icaa2009]

Dear Tax_Counsel, thanks very much for your valuable inputs.

One last question: is the sale of the residence considered as taxable event ?

Best regards.

[Tax_Counsel]

The sale of real estate, including the sale of a residence, is a taxable event. That is why the FIRPTA requires withholding when foreign persons sell U.S. real estate—to help ensure that the tax owed (if any) is paid by the foreign person. In general, you are taxed on the gain on the sale. The gain is the difference between the sales price and your adjusted basis in the home. The adjusted basis on property you purchased at fair market value is the price you paid for it plus the cost of any improvements to the property you make (maintenance and upkeep costs do not count) less any deprecation that you took or could have taken on the property. Depreciation is not allowed for your personal residence, however.

So, if you buy a personal residence for $100,000 and spend another $30,000 to put an addition on the home, your adjusted basis is $130,000 assuming it is always used as your residence and not subject to depreciation. Then if you sold it later for $170,000, your gain is $40,000. Under FIRPTA, gain on the sale of real estate by a foreign person is treated as income effectively connected with a U.S. trade or business. What this means is that the gain will be taxed the same way it would if it were sold by a U.S. citizen or resident. Thus, if the real estate had been held for more than one year, it would be taxed at the more favorable long-term capital gains rates for individual, meaning a maximum tax rate of 15%. So, in this example, the tax may be as much as 15% x $40,000 = $6,000.

There is a gain exclusion rule that may help you as well. Under IRC § 121, if you sold a home that you both owned and lived in it as the principal residence for at least 2 of the 5 years immediately preceding the date of sale, you may exclude gain up to $250,000 ($500,000 if married filing a joint return) from your income. In my example above, if the seller had owned the home and lived in it as his personal residence at least 2 of the 5 years before the sale, the entire $40,000 of gain is excluded from income and he pays no federal income tax on the sale. If you don't meet the 2 requirement, you may still get a partial gain exclusion if you had to sell the home due to circumstances that were not reasonably foreseen at the time you bought the home. The amount of the exclusion is determined by the formula (number of days you lived in and owned the home) / 730 x $250,000 (or $500,000 if the joint return rule applies). The 730 days is the number of days in two years.

Again, using my example, if the seller had lived in and owned the home for 365 days and sold it because his employer transferred him to another city, he'd qualify to take use the reduced exclusion rule so long as his transfer was not foreseeable when he bought the home. So, he'd get to exclude gain up to 365/730 x $250,000 = $125,000. Since the maximum gain exclusion here is still more than his actual gain of $40,000, he still pays no tax on the gain.

You were in the U.S. exactly 2 years from your post. Unless you bought the home before you got here and lived in it the entire two years, you won't get the maximum exclusion amount of $250,000. But you may qualify for the reduced exclusion, and that can still save you considerable tax.

See IRS Publication 523 for more details on the tax treatment of selling your home.

Note that the state may use different rules for taxing the sale of the home, so even if you don't have any federal income tax on the sale, there still might be state income tax to pay.

Note that the only difference that being a resident alien or non-resident alien will make to the federal income tax is whether you are subject to the withholding requirements under FIRPTA and which tax return form you file (Form 1040 or Form 1040-NR). The federal income tax you ultimately pay will be the same in any event.

Finally, in the event that you are considered to be both a resident of Canada under Canada's rules and of the U.S. under the U.S. rules for the same year, you'd look to the U.S. - Canada income tax treaty to determine which country you are resident for tax purposes.

[icaa2009]

Dear Tax_Counsel, I thank you very much for very valuable inputs !

Wonder if you would provide me your contact information should I need to retain an expert to help me on matters discussed.

My email address ####.com

G'day