Owning real estate abroad can be financially rewarding, however, a vital aspect to consider is the tax implications on the sale of such property. Keeping yourself well-informed will ensure you are not caught unawares and confronted by huge tax liabilities. The US is one of the few countries that extends its tax net beyond its boundaries and as soon as you sell property abroad you land under the IRS spotlight.
A key aspect to be considered when selling property abroad is capital gains tax.
Capital Gains Tax
Capital gains tax is levied on profits earned on selling a capital asset such as real estate. This means that if you sell property in the US or abroad and make a profit or loss, you must report it, and capital gains tax could be owed on the profit. The IRS frowns on attempts to dodge capital gains tax, so ensure you pay up. Gains from foreign property sales are regarded as foreign income.
You must consider these factors when reporting on the sale of your foreign property:
- Sale of a primary foreign residence: Your foreign residence qualifies as your principal residence if you lived in and owned it for at least 24 months out of the last 60 months ending on the date of the sale of the property. Any gains from selling such property are usually tax-free below certain thresholds.
- Sale of inherited foreign property: For the sale of inherited foreign property, the rules are similar to those for the sale of a primary foreign residence. However, once a forebearer passes, the property value is stepped up to its fair market value on the date of the forebearer's passing. Your capital gains would be calculated based on this stepped-up value.
- Sale of foreign rental property: When you sell a foreign rental property your profits could be taxed at multiple rates, depending on your holding period, depreciation, etc.
Foreign Tax Credit
Foreign tax credit comes into play when the country where the foreign property is located requires you to pay tax on capital gains. This will result in double taxation, and foreign tax credit ensures you avoid paying capital gain taxes in two countries.
Compliance and Optimization
The following tips will help you comply with regulations about foreign property sales:
1. Maintain immaculate records
Ensure you maintain squeaky-clean records regarding the purchase and sale of your foreign property. Track all your expenses on renovations, maintenance, property management fees, etc.
2. Strategically time your sale
Try to strategically time the sale of your foreign property since capital gain tax rates depend on how long you owned the property. Short-term capital gains taxes are levied on properties held for less than a year and are charged at higher rates. Long-term capital gains taxes are levied on properties held for over a year and are charged at lower rates.
3. Obtain professional guidance
It is advisable to seek professional help before selling foreign property. Consult an expat tax advisor about the tax implications of the transaction.
Selling foreign property isn't just about which country your property is located. False compliance strategical maneuvering and financial finesse. So, if you are considering selling your foreign property keep the taxation issues in mind. With the right approach, you can keep your gains in your pocket rather than handing them over to the IRS.
Finlotax: An Established Accounting and Taxation Firm in CA
We are Finlotax, a professional bookkeeping and taxation firm based in CA. We offer multifaceted bookkeeping and taxation services for individuals and businesses. Consult us before selling your foreign property and we will help you through the practical details of taxation and compliance. Contact us today at 4088229406 and schedule a consultation.