Canadian Home Sale After Moving to the US: Tax in Both Countries

Selling a house in Canada after moving to the US: which country taxes it first?

Both countries can tax the sale. Canada taxes it first because the home is in Canada: the treaty lets the country where real property sits tax the gain (Article XIII(1)). The US taxes you as a resident on your worldwide gain, then allows a credit for the Canadian income tax under Article XXIV(1).

Each country works out its own gain with its own rules and currency. Canada's principal residence exemption does not carry over to the US return, and the US exclusion does not reduce Canadian tax.

A case is not simple when:

• you are past the US exclusion window (about three years after you moved out), so the US may tax the whole US-dollar gain;
• you already sold without the section 116 notice, or never filed your departure return;
• the home was rented after you left (see renting your Canadian home after moving to the US);
• you made or are weighing the Form T2061A election at departure;
• the exchange rate moved sharply between purchase and sale.

Gather the purchase and sale contracts, receipts and payment dates for improvements, the dates you lived in the home, your move date and the reason for it (such as a job offer), your Canadian departure return, and later the section 116 certificate or holdback statement and the Canadian notice of assessment for the sale year.

Can the US home-sale exclusion (section 121) cover a home in Canada?

Yes, if the home was your main home. Under IRS Publication 523, you may exclude up to US$250,000 of gain, or US$500,000 on a joint return, if you owned the home and lived in it as your main home for at least 24 months of the 5 years before the sale. The test does not ask where the home is, and years you lived in it while in Canada count.

The 24 months need not be one block; 730 days in total is enough. On a joint return, only one spouse must meet the ownership test, but each spouse must meet the use test for the higher limit. The exclusion is also unavailable if you excluded gain on another home sold in the 2 years before this sale (Publication 523). Selling the Canadian home first and claiming the exclusion can therefore block it on a US home you sell within 2 years.

How long after moving can you sell and still use the US exclusion?

About three years from the day you stopped living in the home, if you lived in it at least two years before that. After the move, the 5-year look-back slides forward each month; once fewer than 24 months of your use fall inside it, the full exclusion is lost (Publication 523). A partial exclusion may still apply if the sale is because of a work move, health or an unforeseen event. A work move qualifies automatically if the job change happened while you owned and lived in the home and the new workplace is at least 50 miles farther away (26 CFR 1.121-3(c)(2)). The reduced limit is your months of use in the 5-year window divided by 24, times the full limit (Publication 523).

Renting the home in between does not by itself break the window. Time after your last use as a main home, within the 5 years before sale, is not "nonqualified use." Non-home use before your last use, from January 1, 2009 on, can reduce the exclusion. Depreciation allowed for the rental years is never excluded and is taxed on the sale. The rental details are on renting your Canadian home after moving to the US.

What is your US cost basis in a Canadian home?

Your US cost is what you paid, plus improvements, turned into US dollars at the exchange rate when you paid. Moving to the US does not reset it to the value on arrival. The IRS requires each foreign-currency amount to be translated at the rate prevailing when you receive, pay or accrue it (IRS foreign currency rules). The sale price is translated at the rate on the sale date.

Keep the purchase statement, proof of each improvement and the date paid. The only way the US cost changes to the value at departure is the treaty election in Article XIII(7), which needs the Form T2061A election in Canada.

Why the US-dollar gain can differ from the Canadian-dollar gain

The US gain is the sale price at the sale-date rate minus the cost at the purchase-date rate, so currency swings change it. If the Canadian dollar was strong when you bought and weak when you sell, the US gain shrinks and can even become a loss, which is not deductible on a personal home (Publication 523), while Canada sees a large gain. The reverse can produce a US gain larger than the Canadian one.

The US exclusion applies to the US-dollar gain, because that is the gain on your US return. Paying off a Canadian-dollar mortgage can create a separate US currency gain or loss; see US tax on property abroad.

Should you elect at departure to treat the home as sold (Form T2061A)?

Maybe, but it is a tradeoff that is hard to undo. Leaving Canada does not deem Canadian real property sold (CRA dispositions of property). You may elect on Form T2061A to report a deemed sale at fair market value anyway (Form T2061A; section 128.1(4)(d)). The form is attached to your Canadian return for the year you ceased to be resident, so the choice is made on the departure return.

When Canada taxes a deemed sale, Article XIII(7) lets you elect for US purposes to be treated as if you sold and bought back the home at fair market value. Under Rev. Proc. 2010-19, you elect on your timely filed US return for the first tax year ending after the move, with Form 8833 and proof of the Canadian value and that the gain was reported in Canada. The election must cover every property Canada deemed sold, needs a net Canadian gain on them, creates no US tax if you were not taxable in the US at departure, and cannot be revoked without IRS consent. Whether a home whose deemed gain the exemption fully covers qualifies as "taxed", and how a deemed repurchase affects the US ownership test, are not settled in IRS guidance; both call for advice before you elect. The US cost reset matters most if you expect to sell after the US window or the gain exceeds the exclusion. Weighing the choice before you go is covered in keep or sell your home when leaving Canada.

Principal residence exemption after moving to the US: what stays tax-free in Canada?

Only the share of the gain tied to years you were resident in Canada. The exemption fraction counts years the home was your principal residence while you were resident, plus one extra year only if you were resident in the year you bought it (Folio S1-F3-C2, ¶2.20). The rest is a capital gain, of which 50% is taxable. The formula is worked through on selling your home after leaving Canada.

Do you pay US tax on the sale of a house in Canada, and how do you avoid paying twice?

You pay US tax only on the US-dollar gain the exclusion does not cover. Canadian tax on the sale can be claimed as a foreign tax credit on Form 1116, because gain on real property is sourced where the property is (Publication 514). The credit is limited to the US tax on that foreign-source income, so Canadian tax on a gain the US excluded has no US tax to reduce on this sale; it can be carried back 1 year or forward 10, but it helps only if you have other foreign income in the same category.

• Credit category: the gain is usually passive category income, but it is treated as general category if the Canadian tax on it exceeds the highest US tax on it (Publication 514). Limits and carryovers are on foreign tax credit limits, baskets and carryovers.
• Only the final Canadian tax counts: the buyer's holdback is a prepayment, not the tax. The credit follows the tax assessed on your Canadian return.
• Net investment income tax: gain not excluded under section 121 is included in net investment income, so the 3.8% tax may apply if your modified adjusted gross income exceeds US$200,000 (US$250,000 joint) (Instructions for Form 8960). The credit for Canadian tax does not reduce this tax (26 CFR 1.1411-1(e)).
• State tax: your state may tax the gain too, and some states, California among them, give no credit for tax paid to Canada (FTB Schedule S instructions).

What to file in each country for the year of sale

Canada and the US each need a return, and Canada's paperwork starts at closing.

A non-resident individual who disposes of taxable Canadian property must file by April 30 of the following year (CRA); the designation is made on that return (Folio S1-F3-C2, ¶2.15). If the US return is filed before the Canadian tax is final, the credit may need to be updated later. The notice, certificate and holdback are on non-residents selling Canadian property, and recovering a holdback on buyer held back your sale proceeds.

Example

All figures are illustrative. Exchange rates are assumed; Canadian figures are in Canadian dollars (C$), US figures in US dollars (US$).

Sold two years after moving

A single person bought a Toronto condo in 2018 for C$400,000 (US$300,000), lived in it until moving to the US in June 2024, and sells it in June 2026 for C$700,000 (US$500,000).

• US: gain US$200,000. The 60 months before the sale (from June 2021) hold 36 months of use, so the whole gain fits within the single exclusion.
• Canada: gain C$300,000. Exempt share = (7 resident years, 2018 to 2024, plus 1) ÷ 9 years owned (2018 to 2026) = 8/9, about C$267,000. About C$33,000 is a capital gain, half of it taxable, reported after the section 116 steps.
• Double tax: the US taxes nothing, so the Canadian tax has nothing to offset on this sale and usually stays a cost.

Same condo sold four years after moving

The sale is in June 2028 at the same prices.

• US: the 60 months before the sale (from June 2023) hold 12 months of use, short of 24. If she moved for a job at least 50 miles farther away, the reduced exclusion is 12 ÷ 24 × US$250,000 = US$125,000, leaving US$75,000 taxable; if the move was not for work, health or an unforeseen event, the whole US$200,000 is taxable. Net investment income tax applies to the taxable part if her income passes the threshold.
• Canada: Exempt share = 8 ÷ 11 years owned (2018 to 2028), about C$218,000. About C$82,000 is a capital gain, half of it taxable.
• Double tax: the Canadian tax on that slice is claimed on Form 1116 against the US tax on the foreign-source gain, within the credit limit; it does not reduce any net investment income tax.

Couple weighing Form T2061A

A couple's home rose sharply in value before they left. Electing on T2061A at departure would report a deemed sale in Canada: tax then on any part the exemption does not cover, a Canadian cost reset to departure value, and Canadian tax on most later growth. In return, Article XIII(7) may reset their US cost to the departure value, which helps if they sell after the US window. Not electing keeps their old cost in both countries and lets the exemption fraction shelter part of the later growth.

Different for you?

• You already sold without the section 116 notice, never filed your departure return, or received a CRA letter: get cross-border tax help before you file either country's return.
• You are past the three-year window, the US gain exceeds the exclusion, or you hope a job move gives a partial exclusion: the timing and credit math need cross-border tax help.
• You are weighing the T2061A and treaty election: the choice is hard to undo; get cross-border tax help before you file the departure return.
• The home was rented after you left: see renting your Canadian home after moving to the US.
• The home is in Quebec: Quebec has its own non-resident sale notice and certificate; see non-residents selling Canadian property.
• The buyer's lawyer held back part of the price: see buyer held back your sale proceeds.
• You are working out the Canadian exemption fraction: see selling your home after leaving Canada.
• You have a Canadian-dollar mortgage or own other homes abroad: see US tax on property abroad.
• You are still planning the move: start with moving from Canada to the US.