US Expats might suppose that if they do not live in the United States, or if the property they bought and sold are not located in the US, that there will be no need to report or pay taxes on any gain from the sale – but this is not the case at all.
Disclaimer: US Expat taxes are complicated. This guide serves only as a general introduction to the tax implications of selling a non-US investment property. Before selling any property, we strongly recommend that you receive a consultation from a US Expat Tax professional. Before preparing and filing your taxes, be sure to hire a professional or read all IRS publications and form instructions carefully.
US Expat Taxes and the Sale of Foreign Investment Property
US persons must report (and possibly pay taxes on) the sale of foreign investment property just as if residing in the United States – even if the property is not located in the United States.
Let’s say for example you are a US person living in the UK and you bought and sold piece of land in Costa Rica. The purpose of this ownership was strictly for investment. You never built on, rented out, or lived on the property. You never stepped foot in the United States for the entire period of ownership.
In this case, and pretty much all cases, taxes on any gain from the sale would still be reported and taxed in the US at the long or short term capital gain tax rates as appropriate.
You might qualify for the foreign tax credit, however, which might reduce some or all of the capital gains tax on the sale.
Cost basis of the sale of foreign investment property
The gain on the sale of investment property is generally equal to the net proceeds of the sale less the cost basis of the property.
Net proceeds is basically the sale proceeds minus any transaction costs.
Costs basis is how much you paid for the property, including transaction costs and major capital improvements (additional investments of money to improve the value of the property).
As an example, let’s say you bought an investment property for $20,000 US Dollars and you paid $500 in title deed recording and transfer fees.
While you owned the property, you had to install irrigation components for $4,000 which great affected the value of the property.
Then, you sold the investment property for $35,000 US Dollars and it cost you $2000 in commissions and transaction fees.
Your cost basis is $24,500 and your net proceeds is $33,000, leaving you with a capital gain of $8,500.
Long term vs. short term capital gains on the sale of foreign investment property
If you owned the investment property for one year and a day or more, then the gain is treated as a long term capital gain. Long term capital gains are taxed at a lower rate than short-term gains.
Depending on your total income, including the gain from the sale, your long term capital gains tax rate will be 0%, 15%, or 20%. Most working class taxpayers fall into the 15% bracket.
If you have sold foreign investment property and you want to calculate what your tax liability might be from the sale, it’s probably best to plan on 20% and be pleasantly surprised. If you really need to know accurately, look up the capital gains rates here or hire a tax professional to help you.
Foreign investment property sales and the foreign tax credit
If you calculate that you will have a capital gains tax liability to the US from the sale of foreign investment property, but you already owe the tax on the sale to another country, you might qualify for the foreign tax credit.
The foreign tax credit is designed by policy makers so that you are not double taxed by more than one country on the same income.
In many cases, if you pay more in tax to a country on the gains from the sale, you will likely not owe any tax to the United States. If you pay less tax in another country as compared to what you owe to the US on the sale, you will likely owe the difference to the United States.
The rules and technical aspects to claiming the foreign tax credit are very complicated. Please retain a US Expat tax professional for help with claiming the credit.