Canadian citizens are not subject to capital gains tax when they sell their principal residences. Americans selling their homes in Canada, unfortunately, may have to pay the tax.
As Terry Ritchie explains in this Globe and Mail video segment, Americans face the tax whether their home is in the United States or Canada. In most cases, they are entitled to a U$250,000 exemption—U$500,000 if married on the realized capital gains on their Canadian principal residence. However, home prices have appreciated sharply in areas like Toronto and Vancouver, meaning sellers may surpass the exemption amounts and face the 15% long-term gains tax.
What’s more, Americans could face additional taxes depending on the size of their overall world income. They include the 3.8% Obamacare surtax, which kicks in on income over U$125,000 for single or married separate filers or U$250,000 for couples. And if the gain is substantial enough to push their income beyond U$400,000 for single or married separate filers or U$450,000, the long term capital gain rate increases from 15% to 20%.
The IRS relies on home sellers to declare their gains and pay the proper tax. But be aware that Americans living abroad do have to declare assets under the Foreign Account Tax Compliance Act (FATCA). That means IRS auditors could require explanations about the source of certain assets.