Owning A Home In The US Vs Canada

One thing the US has over Canada when it comes to home ownership is they can deduct the interest cost on their mortgage off their income tax. Canada doesn’t allow this. However, Canada has one advantage to home ownership the US doesn’t have – there is no capital gains tax on the sale of a principal resident. When you sell the house you live in, there is zero tax on the gain. The US will tax that gain unless the seller buys another house of equal or greater value within a certain time period (I believe 18 months). The US setup encourages home ownership and big mortgages. It also indirectly promotes never paying off your mortgage because if you pay it off, you lose a huge tax deduction that you were taking. It’s not unusual for financial planners to tell their clients to buy a bigger house so they can get a bigger mortgage and get a bigger tax deduction. That’s not really good financial advice. If you live in the US and If this is what your financial planner is telling you, then get a new advisor.

Canada’s system encourages home owners to pay off their mortgage as fast as possible. Because the interest on the mortgage can not be deducted, they have to be paid with after tax dollars. One may think this will discourage home ownership and one would be right. This is why Canada offers zero tax on the capital gains of your primary house. If you sell anything else that goes up in value – stocks, bonds, mutual funds, etc – the Canada Revenue Agency will want their share, unless it’s your home. The house I currently live in has gone up over $100,000 this year. If I were to sell it, that $100,000 gain would be tax free. Compare this to making $100,000 of employment income. In that case I would have to pay nearly $30,000 in income tax. Home ownership definitely has its tax advantages.

Whether you live in Canada or the United States, owning your own home is a good financial move for most people. The US offers yearly interest deductions while Canada offers tax free capital gains. But what if you want to have your cake and eat it too? The tax free capital gain is nice but being able to deduct the mortgage interest would be even nicer. After all, you only realize a gain when you sell. Interest deductions can be claimed every tax year. Well, there are few ways to make part or all of your mortgage interest tax deductible under Canadian tax laws. But that’s for another blog post.

4 thoughts on “Owning A Home In The US Vs Canada”

  1. Investorial says:

    Let me guess, Smith Manoeuvre?? He’s also out in Western Canada so I think you must have heard of him right?

  2. John Chow says:

    The Smith Manoeuvre is one way for average Canadians to turn their non deductible interest into deductible interest over time. I have a few other ways. 🙂

  3. Jon waraas says:

    I the US, if you live in a house for 2 years you are only taxed on 60%(I think) of the gain. So thats like 13,000 of the 100,000 gain. Only if you live in the house for 2 years or more. And its one year for raw land.

  4. JT Chandler says:

    Your facts are not correct. In the US, there is no capital gains as a individual tax filer if you have lived in the residence a minimun of two years out of five and your net gain is $250K or less and if you file jointly husband/wife the level increases to $500K tax free. Since the medium property price in the US falls well short of $300K this leaves a large majority of sellers in the no capital gains tax bracket. Plus we get the mortgage right off and on top of that we don’t have a socialised medical system and the US overall tax level is about half what Canadians pay. John you need to pack up and migrate here so you can buy that Enzo. Love you man…

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