Capitol Gains Tax on Foreign Property

[Depwojo]

Background.  My wife and I got married in July 2020.  She is a dual US/Canadian Citizen working and living in Canada since 1994 .  She bought her house in 2001.  Since she is a duel citizen she isn't subject to pay any Canadian Capitol Gains Tax, however, she will have to pay US Capitol Gains Tax.

Our plan is to sell the Canada house in 2021 and move back to USA and purchase a house in Arizona.

I sold my house in Washington State that I purchased in 2009 in December of 2020.  That's 5 months after we got married.    

We are filing our 1st joint tax return and have a a few questions on Capitol Gains Tax.

I knew we had to report and possibly pay Capitol Gains tax on the sale of the house in Washington State, however we didn't know we had to pay Capitol Gains tax to Uncle Sam until recently. 

The question we have is since both houses were purchased well before we were both married and living/working in different countries is there a way we can both can qualify for the exclusion within the 2 year and or avoid the look-back requirements period all together? 

If we don't qualify would paying the tax on the sale of the Bonney Lake house in December of 2020 be better and and use the $500,000 exclusion on the Canada house that will be sold in 2021 for much bigger profits?

Hope this makes sense!

Mark

[DaveF1006]

It depends. The good news is that you can claim the ownership and use test for your Washington house because you owned it for five years prior to sale and you lived in it for at least of those five years. You also qualify for the $500K because you are filing Married Filing Jointly, even though only one of you lived in the house.

Now if you wish to claim an capital gains exclusion for the home in Canada, you will need to wait two years from the sale of your Washington home. Same rule applies though because only one of you would need to own and live in the home. Sounds like your wife lived and owned that home since 1994.

[Depwojo]

Thank you for the response.

Can we avoid waiting the 2 year period to sell the Canada house if I pay the full tax on the sale of the Washington State house?

Would we get the full exemption on the sale of the Canada house?

[Depwojo]

Dave,

I appreciate the help.  I sent a follow-up question yesterday but not sure if you saw it.

My follow-up question was can we avoid waiting the 2 year period to sell the Canada house if I pay the full excise tax amount on the sale of the Washington State house?

Would we get the full exemption on the sale of the Canada house?

[DaveF1006]

No, I would wait for the two-year period to occur. Please read this IRS link for further details.  There is no exception to this rule unless you did not exclude the capital gains on the sale of the first home.