Foreign property and non-resident alien spouse

[jyee315]

My wife is Canadian and is a non-resident alien. I am a US citizen, and primary residence in US. For years, I have filed "married filing jointly", treating my Canadian wife as a resident alien for tax purposes. She is likely going to inherit her parent's house (in Canada) for which she is living in it as a primary residence, and maybe selling it soon after. In Canada, if it is your primary residence, it is completely tax exempt. The gains on it is substantial as they owned the house for > 30 yrs. 

1) When I file US taxes, do I have to include the sale of this house that is in Canada, and do I have to pay US taxes on this?

2) Is it possible for one year to file as "married filing separately", then go back to "married filing jointly" the next year?

[rjs]

Let's answer question 2 first. Yes, since this is not the first year that you are treating your wife as a resident, you can file separately, then go back to filing jointly the following year.

As for question 1, if you file jointly you would have to include the sale of the house on your U.S. tax return. If you file separately, you would not have to include the sale of the house on your separate U.S. tax return. But since your wife has chosen to be treated as a U.S. resident, she is required to file a U.S. tax return and she would have to include the sale of the house on her tax return. If she sells the house "soon after" she inherits it, she would not qualify for the exclusion of gain on her U.S. tax return because she would not have owned the house for 2 years before selling it.

You could possibly revoke the choice to treat your wife as a resident, but revocation is permanent. Once you revoke the choice you can never make the choice again.

Taking a quick glance at some of your previous questions, it appears that there are other considerations that you have not mentioned here that might make the situation more complicated. I suggest that you consult a tax professional who can review your entire tax situation and give you guidance.

Here are a couple of IRS publications that you might want to take a look at for some background.

Publication 519, U.S. Tax Guide for Aliens, particularly the section "Nonresident Spouse Treated as a Resident" in Chapter 1

Publication 523, Selling Your Home

[jyee315]

Thanks so much for the reply. I think I am not fully understanding this, let me try to elaborate. Assume my wife owns the property now, and this year will sell it. If I elect to file for my taxes "married filing separately", then I would exclude my wife's information on my tax return. As my wife is Canadian and has no US assets or income from the US, there is really no reason for her to file US taxes for 2024.

   But are you suggesting that since I have treated her as a resident alien for prior tax purposes, that she is obligated to file US taxes moving forward, even if we are filing separately indefinitely?

[rjs]

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@jyee315 wrote:

I think I am not fully understanding this, let me try to elaborate. Assume my wife owns the property now, and this year will sell it.

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In your original question you said "She is likely going to inherit her parent's house." "Inherit" has a specific legal meaning, a transfer of ownership from a deceased person to an heir. If she is going to (which implies in the future) inherit the house, then she does not own it now. She will own it after she inherits it. But now you say "Assume my wife owns the property now." If she already owns it, she is not going to inherit it. You have to make sure that you have a clear understanding of who owns the house and who is selling it, and you have to be very clear about that when you talk to the tax professional. If there is any confusion or doubt about who actually owns the house, you might have to consult a Canadian real estate attorney.

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@jyee315 wrote:

But are you suggesting that since I have treated her as a resident alien for prior tax purposes, that she is obligated to file US taxes moving forward, even if we are filing separately indefinitely?

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Yes, that is exactly what I'm saying. You really need to read "Nonresident Spouse Treated as a Resident" in Publication 519, which I referenced in my previous post. To quote a short part of one sentence from that section, "Once made, the choice to be treated as a resident applies to all later years" unless it is suspended or ended as described in the publication. So yes, she is treated as a resident indefinitely, and a resident alien is required to file a U.S. tax return the same as a citizen, and report her worldwide income, not just U.S. income. A tax professional who is familiar with the rules for aliens will be able to explain this further.