Understanding the Tax Implications of Selling Foreign Property
When it comes to understanding the tax implications of international property transactions, it can join a convoluted world of rules and regulations. One of the biggest changes in recent times is the government’s decision to impose capital gains tax on foreign investors selling homes that are not their primary residence from 2015. So how does capital gains tax on foreign property work, and who else might it affect?
What is Capital Gains Tax on Foreign Property?
In simple terms, capital gains tax is a levy on the profits from selling property or an asset. In cases of foreign property, this means that the profits earned from selling property abroad will be subjected to capital gains tax. This will apply to non-residential property and individuals who are not the primary residence of the property in question. In cases where the non-residential property is not the investor’s primary residence, the capital gains tax rate can go up to 28%.
Who is Affected by Capital Gains Tax on Foreign Property?
Along with non-resident foreign investors, capital gains tax can affect expatriate homeowners who opt to buy or invest in overseas property rather than rent. In such cases, the capital gains tax will apply to both any interest earned from the sale and any benefit from the sale of the property itself. Furthermore, depending on the investor’s home country, a percentage of the profits may also be taken as an annual tax, so it is important to do your research and be aware of all obligations.
From the U.S. investor’s perspective, the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) applies to capital gains on foreign investment property, including mortgages. If the investor or the buyer is an American, the U.S. government will impose the 10% capital gains tax on the sale of the foreign property just as it would any domestic sale. This is in addition to any tax imposed by the foreign government or any tax due to the mortgage company.
Finally, as well as capital gains tax, if a foreign investor has taken out a loan to purchase a property abroad, they will also be subject to any interest payments accrued on the loan during the period of ownership. This is something to consider when purchasing overseas property.
When it comes to understanding capital gains tax on foreign property, the most important thing you can do is seek the advice of an experienced expat and tax expert who is familiar with the tax implications of international property transactions. H&R Block’s Expat Tax experts can help non-resident foreign investors and expats navigate the complex world of international tax laws, ensuring you are aware of all tax obligations and taking care of your returns with the minimum of stress.
With the right expert help, you can keep the costs and complexities of foreign property transactions to a minimum, and ensure that selling overseas isn’t an intimidating or financially damaging experience.
What Are Capital Gains on Real Estate Sale?
Capital gains are any profits from the sale of a capital asset, in this case, real estate. The profit you make is generally taxable, depending on the length of time you have owned the property and your individual circumstances. When you sell a primary residence or investment property, the profit made from the sale is generally subject to capital gains tax.
The amount of tax you owe may differ depending on several factors. How long you’ve owned and lived in the property, your income, the local housing market, and cost basis are all factors the IRS considers before computing the total taxable income. Though the amount of capital gains tax you owe on a home sale may be hefty, there are several potential options to receive a break.
How to Qualify for the Home Sale Exclusion
One of the most popular capital gain tax breaks is the home sale exclusion. Not everyone qualifies, but the exclusion allows compensates the taxpayer for a little over a years’ worth of capital gains tax. The exclusion is often attractive, but there are several criteria you must meet.
You must have owned the property for two out of the five years leading up to the sale – this requirement takes into account ownership, not just residence. In addition, you must also have lived in the house as a primary residence for two out of the five years for which you have owned the home. The exclusion applies to both single and joint filers, but if you jointly file with a spouse, you must have lived in the property together on the same deed.
The exclusion also limits the amount one person can claim. You can only receive a maximum exclusion of $250,000 dollars ($500,000 dollars for joint filers) from the sale of a single, primary residence. Once you’ve exceeded the IRS’ limit, you will need to pay the full capital gains tax on the remaining profit.
Comparing the Home Sale Exclusion and Section 121
The home sale exclusion is not the only way to gain a break on capital gains tax. Section 121 of the US Internal Revenue Code provides yet another option. This section considers a wider range of assets, provided you’ve held the asset in question for five years or longer. The gains you receive are not just limited to residential real estate but includes any capital gains made from the sale of an asset, excluding inventory.
Unlike the home sale exclusion, Section 121 does not have a limit of the exemption. You can potentially receive full exemption on all capital gains. However, some assets may require a partial removal of the exclusion if the money made from the sale exceeds certain limits set by the IRS.
Unlike the home sale exclusion, Section 121 does not have a requirement for the taxpayer to have lived in the house for at least two years. So even if you have held the asset for five years, you may still be eligible to receive a tax break.
Regardless of which option you choose, both are incredibly helpful in reducing your tax bill after the sale of a home. It is important to note that in order to receive any break on the capital gains tax, you must adhere to the rules and regulations set by the IRS. Be sure to consult with a financial advisor before transferring any title of real estate.
