I am a dual citizen and currently a long-time U.S. resident, but moving back to Canada this year. I would like to do a 1031 exchange of one U.S. rental property into another U.S. rental property of slightly lesser value, and I would like to time the exchange to avoid paying capital gains taxes in Canada if possible. (My understanding is that since Canada doesn't have a tax law similar to a 1031 exchange and there would only be U.S. taxes paid on the boot, then if I was a Canadian resident at the time of the exchange, I would pay tax on the remaining gain in Canada.) So I was wondering if I am correct in thinking that:
1. As long as the sale of the relinquished property closes prior to becoming a Canadian resident again this year, that I won't be subject to taxation on the gain in Canada?
2. The purchase of the replacement property can occur either before or after the move to Canada as long as the 1031 exchange criteria are met?
Or, are there any tax consequences regarding the timing of the purchase, or the funds going through an intermediary, or the release of the boot relative to changing residency that I am unaware of?
This is a really interesting scenario and I’ve run into this question a few times this year with clients. This is definitely a great question for a CPA/Accountant and I’d like to see what people on the forum come up with.
If you don’t need the cash and are an Accredited investor, you could 1031 the boot into a Delaware Statutory Trust and defer all tax. (DST - managed real estate within this trust which is exchange eligible and completely passive; you get pass through income and depreciation) But if the boot is small and the tax isn’t bad, it may not be a big deal.
I’m curious to see if the boot is taxed only in the US or both US and Canada...
Thanks for posting this question.
Not sure and but you may have a bigger issue which definitely needs Canadian tax advice on. As a Canadian citizen, I think you are required to file returns annually regardless of where you live. If this is correct (again I am not sure) then you should already have filed current ownership of property which would make past and any planned 1031 exchanges invalid from a Canadian perspective. Better safe then sorry... run don't walk to a CA that specializes in this kind of thing.
@Cathy McNair , residency is going to be irrelevant for your 1031. I don't see issues at all with the US part of your transaction. All your issues surround CA law and interpretation. Find that chartered accountant.
@Cathy McNair Dave is correct as you can do the 1031 within the US but you will still be required to report the gain here in Canada. Since you don’t have the cash from the sale you can’t pay the Canadian tax and will
Not be eligible for a foreign tax credit resulting in double taxation. Feel free to reach out to me if you would like to discuss