Are you planning to sell or buy your property overseas? Are you aware of US expat taxes on foreign assets? No, don’t worry at all! USTAXFiling is here to give you details related to selling and buying your house overseas.
Selling or purchasing abroad may complicate your tax needs. In this blog, let us discuss US expat income taxes on foreign property and what they mean for you. Here is everything you should know about selling and purchasing your house overseas.
Major Facts
- Selling or purchasing foreign assets might create income tax obligations in the country of residence. Purchasing property abroad does not trigger a US tax reporting needs. Selling foreign assets might result in capital loss or gain that is reportable on your income tax return in the United States.
Taxes on Foreign Assets
Being an Expat residing overseas, you don’t have to report the foreign property purchase on your US income tax return. But, you have to report any loss or gain from selling a foreign asset. You also have to report any kind of rental income you receive.
The regulations for reporting a capital loss or gain are the same regardless of where the property is situated in abroad or the US. There are some details that Expats residing overseas should know. Whether you owe taxes depends on different factors.
Tax Implications of Purchasing Property Overseas
Let us consider the income tax implications of purchasing property overseas. You don’t have to report the property purchase whether it is domestic or foreign. One of the exceptions is if there is a Homebuyer Credit in place for that specific year. Also, purchasing assets overseas as an American might prompt other US income tax needs. You have to file a FATCA and FBAR report.
Purchasing Assets Overseas Might Trigger FBAR
When you purchase property abroad, you should have a foreign bank account. It will aid you with the following:
- Paying foreign property taxes
- Closing the sale
- Managing a foreign mortgage
When you open a foreign bank account, you might have to report it. If you have a minimum of $10,000 in one or more foreign bank accounts, you should report it by filing Form 114 FinCEN, also called the FBAR (Foreign Bank Account Report)
Remember
When you transfer money to a foreign bank account, you should be aware of the fees associated and foreign exchange rates with the transfer. When you make the initial down payment on foreign assets, you may transfer some amount of money.
Good enlisting and research along with the assistance of an expert broker might save you thousands of dollars by making sure that you use the beneficial foreign exchange rate.
Purchasing Foreign Assets through a Corporation Might Trigger FATCA
Buying an asset through a holding corporation rather than in your name is compulsory in many countries. It might create an additional tax obligation in the United States. For instance, citizens of the United States with non-US financial assets valued above specific thresholds should file a FATCA report. This eligibility is based on your income tax filing status and whether you wish to continue or not to reside in the United States.
Important Note
If the host country provides different options for the holding corporation you use, you may consult a US tax consultant before making a final decision. Specific types of abroad entities will make it difficult to become eligible for the gain exclusion.
Host Country Tax Needs
For purchasing or selling property, your country of residence has their own tax requirements. Costs charged by real estate agents, legal entities or government agencies might be more than in a US real estate transaction. These expenses involved differ from country to country. You should search local regulations and insurance thresholds for your new host country. It will assist you to save big on your income tax bill.
You may consult with the US embassy in the host country for assistance regarding property taxes, local rules and other needs.
Remember
Mortgage points and interest are deductible on US expat taxes for foreign assets. Also, these details should be reported in dollars, so converting these amounts is necessary before you claim the deduction. The Internal Revenue Service offers annual foreign exchange conversion rates for different links and countries to a reliable third-party website with more detailed information.
Tax Implications of Selling Property Abroad
There are differences between selling a personal residence and selling a rental property. With rental property, you should report the sale regardless of whether you had a loss or gain. If you sell your personal residence at a loss, you don’t have to report it nor you are permitted to deduct the loss. But, if you sell your personal residence for a profit, then you have to pay taxes.
Also, you can exclude $250,000 of gain from a personal residence. To become eligible for this exclusion, you should have lived and owned the asset for a minimum of two years out of the past five years. This exclusion is for property situated inside the United States and foreign property. Gains that cannot be excluded will be taxed at favourable capital gains tax rates.
If you don’t qualify for gains or are not excluded completely, it might be considered a foreign income source and eligible for the reduction by the Foreign Tax Credit. Also, it might not be regarded as foreign-earned income and is not excluded under the FEIE (foreign-earned income exclusion)
To calculate the capital gains, both the sale and purchase should be converted to USD on the date of the transaction. All income should be reported in US dollars on US expat income taxes. You may report the loss or gain on Schedule D of the income tax return.
Exchange Rate Effects on Foreign Property Sales
The important transaction that may result from the foreign residence sale is the loss or gain resulting from the foreign exchange rate conversion when the mortgage is paid off. The currency exchange loss or gain resulting from the payoff of the mortgage is personal. This means loss is not deductible.
Any capital gain is income taxable at ordinary income rates. If you held the property for more than a year, you are eligible for the lower long-term capital gain tax rates. You cannot use the loss on the sale of an asset to offset currency exchange rate gain.
Calculating US Capital Gains Tax: Selling Real Estate Overseas
To assist you explain on how to calculate the capital gains tax linked with selling foreign real estate, let us discuss Steve Expat’s sale of his primary residence outside the United States.
In 2005, Steve moved to Beijing, where he began to search for a house to buy. He found one and on 17 November 2005, he signed the papers to purchase his new house. He paid around 1,86,000 Chinese Yuan for the house on the sale date. On 25 May 2007, he spent 50000 Chinese Yuan on new windows in the home.
He wanted to move back to the United States in 2011 to spend time with his family and put his house on the market. He also signed the closing papers on 24 June 2011, with a sale cost of his home of 2010,000 Chinese Yuan. He had 1,75,000 Chinese Yuan left to pay his mortgage.
As Steve owned and stayed in the house for a minimum of two years of the past five years, he is eligible to exclude the complete gain linked with the sale of his primary residence. The other transaction that may result from the sale of his primary residence is the loss or gain that results from the exchange of the currency.
It might take more USD to pay off the foreign mortgage than the initial date of purchase. This will result in a net loss of $52,785. This loss is not at all deductible on Steve’s US income taxes.
The impact on Steve’s US expat income taxes that might result from the sale of his primary Chinese residence is zero. He will exclude all gains linked with the property sale and he incurred a loss on the exchange of the currency linked with the mortgage payoff that cannot be applied to his other foreign income.
Important Note
When you sell your asset, you have to report the loss or gain depending on the original cost. You should keep all the paperwork from the original purchase with you and any other expenses involved with buying property overseas.
Still, Have Doubts about Selling or Purchasing Overseas?
If you are purchasing a residence abroad, you must discuss options with the host country’s US embassy, you should consult real estate brokers and discuss options with a professional tax consultant.
At USTAXFiling.in, we provide tax assistance for expats residing around the globe. Our talented and dedicated team of tax experts at USTAXFiling, we ensure to discuss your tax-related queries and ensure to resolve your queries at the earliest. USTAXFiling.in would be happy to assist you. So, what are you waiting for? Call USTAXFiling.in right away for your US property tax filing!