Am a dual citizen, canadian and US, resident and working in Canada for the past 18 years, but still required to file US tax returns. My wife is a US citizen, also resident in Canada for the past 18 years. We have filed US taxes jointly every year, and using the foreign earned income exclusion, have not had to pay any US taxes. My wife purchased a rental house in Canada 10 years ago and now wants to sell it. She will need to declare and pay tax on the capital gain in Canada. How is that treated in the US? Does she have to pay tax there too?

Yes, she willhave to claim the capital gains in the U.S. as well, but she can claim a credit on the Canadian taxes paid using Form 1116.