Changes to Replacement Residence Rules for Green Card Holders

Image of mother and daughter - Residence Rules for Green Card Holders - Serbinski Accounting FirmsAlthough green card holders are generally subject to the same income tax rules as U.S. citizens, certain new proposed amendments would make life more difficult for U.S. citizens and green card holders who live in Canada.

Under Canadian tax law, a "principal residence" is exempt from capital gains tax when it is sold. Since a U.S. citizen or green card holder living in Canada must report the sale on a U.S. income tax return, the sale of a Canadian "principal residence" becomes more complicated.   
 
Former Law
Under the former U.S. law, there were two methods by which a capital gain on the sale of a residence could be deferred or eliminated:

Persons who were 55 years of age or older who have used the property as a personal residence for three of the last five years were able to, once in a lifetime, claim an exemption of $US 62,500 of the capital gain ($US 125,000 on a joint return).

If a taxpayer realized a gain on the sale of his old principal residence, the gain was not taxed if he purchased a new principal residence within a specified replacement period at a cost that equaled or exceeded the adjusted sales price of the old principal residence. If the cost of the new principal residence was less than the adjusted sales price of the old principal residence, all or a portion of the realized gain was taxed. The basis of the new residence was reduced by any unrecognized gain on the sale of the old.

The Taxpayer Relief Act of 1997 – New Law

The exclusion of gain from the sale of a principal residence replaces the pre-'97 Act rollover and one-time exclusion provisions that applied to sales or exchanges of principal residences. Under the '97 Act, gross income does not include gain from the sale or exchange of property if, during the five-year period ending on the date of the sale or exchange, the property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating two years or more.

The amount of gain excluded from gross income with respect to any sale or exchange cannot exceed $250,000. The $250,000 limitation is applied by substituting '$500,000' for '$250,000' if:

  • a husband and wife make a joint return for the tax year of the sale or exchange of the property,
  • either spouse meets the ownership requirements with respect to the property,
  • both spouses meet the use requirements with respect to the property, and
  • neither spouse is ineligible for the benefits of the exclusion with respect to the property by reason of the one sale every two years rule.