The taxpayer purchased qualified farmland from his father (who farmed it) for $100,000CAD in 2005. The taxpayer has rented out the land ever since and now has an offer to buy for $450,000CAD . Only his name is on the title as his wife is a US citizen. If he declares the full capital gain, Alternative Minimum Tax will apply. If we do a spousal rollover (with ACB of $50,000) before the sale, the tax bill drops about $10,000CAD.
What would the ACB be for the US return (1040)? The USD equivalent of the CDN ACB of $50,000CAD or the USD equivalent of the current Fair Market Value of $225,000CAD?
For the 1040, the former would create a larger US tax bill than the Canadian tax savings. The latter would have no capital gain and no US tax consequences.
The taxpayer reached out to someone in Washington who applied Washington state community property rules which would mandate the $50,000CAD equivalent. As only 9 states have community property rules, that may or may not apply to the federal rules. I don’t know the US law regarding the 1040 tax treatment of a Canadian spousal rollover.
Both are tax residents of BC and the land is in Alberta and her 1040 will be filed married filing separately.
The sale will likely be complete shortly, so I need a quick response.
Just thinking out loud, but does the husband not expect to have enough taxable income in Canada to soak up or recover his AMT credits going forward? For most people who have taxable income AMT is really just an interest free loan to the CRA that gets repaid to the client as a credit against future taxes owing.
They have plans for money so want as much as they can now.
I don’t know enough about US federal tax code to give you a definitive answer, but it wouldn’t seem appropriate the wife would be able to select a different ACB for each country. I realize that spouses are exempt from the US gift tax, but the general rule in the US is that when real property is gifted to another individual no income tax is triggered on the accrued gain, there is no change in cost base, and the cost base of the gifted property becomes the recipient’s cost base.
While I realize that income tax does not follow logic, it would seem highly probable the property would be received by the spouse at an ACB of $50,000 in both countries, unless she pays market value for half the property. The problem with paying market value, is the husband would have a disposition at market value for half the property, creating a capital gain on that disposition.
Lets pretend they were both US citizens (and Canadian Residents) and he sold the same Canadian property. He would have a US gain of 350,000 in which presumably he would pay some US tax on. If he was able to add his wife’s name to the deed, and her ACB was now deemed to be 225,000 then he would theoretically have been able to reduce his US gain from 350,000 down to 175,000. I’m not sure that would go over really well with the IRS. My thought is you can’t get a tax free ACB bump with a transfer of property between spouses.
Presumably they were already married in 2005, correct?
Correct.
Sounds like the spousal rollover is contraindicated. However, you don’t know until you have all the answers.
Roll over at book value to spouse is acceptable in the US without tax consequence However when sold there will be capital gain which may be taxable in the US