Clinton’s capital gains reform has cross-border costs

Democratic candidate Hillary Clinton wants to introduce medium-term capital gains tax rates.

It could get more expensive to own U.S. investments or homes if Hillary Clinton is elected president.

Her plan would raise capital gains taxes for your wealthiest cross-border clients on property held between one and six years.

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In a move that Clinton says would encourage longer-term investing, she would raise medium-term gains rates for investors in the top tax bracket – those who have $232,500 or more in yearly individual income.

Right now, the U.S. taxes capital gains on property held for less than a year at the same rate as ordinary income. For people in the top tax bracket, that’s 39.6%. Capital property held longer is taxed at 20% for top taxpayers. (This doesn’t include the 3.8% net investment income tax also paid by those in the highest bracket.) Rates for people in lower brackets wouldn’t be affected under Clinton’s plan.

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Clinton’s proposal would enforce the ordinary income rate for two years instead of one, with the rate declining the longer the property is held before sale. Instead of the 20% rate kicking in after year two, it’s the rate for property held for six years or longer.

Proposed capital gains rates

Holding period	Proposed rate	Current rate
1 year or less	39.6%	39.6%
1-2 years	39.6%	20%
2-3 years	36%	20%
3-4 years	32%	20%
4-5 years	28%	20%
5-6 years	24%	20%
6 years or more	20%	20%

Source: Hillary Clinton campaign

“Let’s say you’re Canadian and you buy a condo in Florida,” says lawyer Max. Reed, a cross-border tax lawyer at SKL Tax in Vancouver. “Right now the rules are that if you hold that condo for less than a year, you have to pay tax on it at normal income rates. If you own that condo for more than a year, then you pay a maximum of 20% on the sale of that condo. The institution of a medium-term capital gains rate would increase the cost of selling the condo.”

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Current capital gains taxes for Canada’s high earners range from 23.5% and 26.76%, lower than most of the proposed rates.

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“Under this proposal, unless you held the property for five or six years, you would end up having to pay some additional U.S. tax after you pay the Canadian tax,” says Abe Leitner, lawyer and director of tax planning at Goulston and Storrs in New York City.

He says the tax brackets would reward people who held assets for longer before selling. “If you wait, you’re effectively earning 4% after tax, just for sitting on the asset for another year,” he explains.

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Investments, tax and Obamacare

To fund the Affordable Care Act, the federal government enacted a 3.8% net investment income tax on high-income taxpayers. The charge isn’t covered by the Canada-U.S. Tax Treaty, so eligible Americans in Canada can’t use taxes paid here to offset their obligation.

Republican presidential candidate Donald Trump has said he would repeal the act and replace it with his own, unspecified, system.

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The net investment income tax affects Americans who live in Canada part-time and who are still considered U.S. residents. The tax applies to single taxpayers with more than US$200,000 in income, or married taxpayers filing jointly with US$250,000 in annual income.

Since it’s not covered by the tax treaty, Reed says it’s sometimes the only U.S. tax his clients pay. If it were repealed, those tax bills would disappear.

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